Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following should be read in conjunction with our Consolidated Financial Statements and notes thereto included in Part II, Item 8. “Financial Statements and Supplementary Data,” and Part I, Item 1A. “Risk Factors.”
General Overview
The Company is an owner and operator of golf-related leisure and “eatertainment” venues focused on bringing people together through competitive socializing. Our common stock is traded on the NYSE under the symbol “DS.”
The Company conducts its business through two primary operating segments:
Entertainment Golf Business
Our Entertainment Golf business is primarily focused on competitive socializing within the “eatertainment” industry, combining chef-inspired food and beverage offerings, with innovative technology modernizing ways to experience golf as a sport and form of entertainment that appeals to a broad range of audiences and competitive appetites.
During the second half of 2019, we opened three Generation 2.0 core Drive Shack venues in Raleigh, North Carolina; Richmond, Virginia and West Palm Beach, Florida.
During the fourth quarter of 2019, we briefly closed our first Drive Shack venue in Orlando, Florida to retrofit with Generation 2.0 enhancements, including new ball tracking technology (Trackman™), enhanced gaming and a redesigned outfield to provide a more engaging guest experience.
In 2020, we intend to open one new core Drive Shack venue in New Orleans, LA and intend to continue expanding our geographic footprint on a selective and strategic basis in the following years.
In addition, in 2020, we plan to complement and diversify our experiential offerings with a modern spin on indoor mini golf by launching our new small-store format urban box venue. We expect to open three urban box formats in 2020, and to increase our per-year openings in subsequent years as we continue expanding our geographic footprint. We believe this new format will allow us to access smaller, urban spaces where our core Drive Shack venues are too large to be accommodated by available land for sale or lease, if we are able to successfully launch the new format.
Traditional Golf Business
Our Traditional Golf business, American Golf, is one of the largest operators of golf properties in the United States. As of December 31, 2019, we owned, leased or managed 59 properties across 9 states and have more than 37,000 members.
During 2019, the Company sold 11 golf properties for an aggregate sale price of $80.0 million. As of December 31, 2019, we have successfully sold 24 of our 26 owned golf properties for a total aggregate sales price of $169.7 million, which was reinvested in our Entertainment Golf business as part of our overall growth strategy to expand golf as a sport and form of entertainment, after repayment of the Traditional Golf loan in December 2018.
During 2019, the Company entered into a total of six new management agreements, of which five related to golf properties sold during the year, for which we were retained as manager. In addition, the Company terminated two management agreements on golf properties in California due to course closures.
For further information relating to our business, see “Item 1. Business.”
Market Considerations
Our ability to execute our business strategy, particularly the development of our Entertainment Golf business, depends to a degree on our ability to monetize our remaining investments in loans and securities, optimize our Traditional Golf business, including sales of certain owned properties, and obtain additional capital. We have substantially monetized our historical investments in loans and securities and have a small number of positions remaining that we could sell or use as collateral or support in a lending transaction. We last raised capital through the equity markets in 2014, and rising interest rates or stock market volatility could impair our ability to raise equity capital on attractive terms.
Our ability to generate income is dependent on, among other factors, our ability to raise capital and finance properties on favorable terms, deploy capital on a timely basis at attractive returns, and exit properties at favorable yields. Market conditions outside of our control, such as interest rates, inflation, consumer discretionary spending and stock market volatility affect these objectives in a variety of ways.
Entertainment Golf Business
Our ability to open our targeted number of Entertainment Golf related venue formats in 2020 and beyond will depend on many factors, including our ability to identify sites that meet our requirements and negotiate acceptable purchase or lease terms.
There is competition within the bid process, and land development and construction are subject to obtaining the necessary regulatory approvals. Delays in these processes, as well as completing construction and recruiting and training the necessary talent, could impact our business.
Trends in consumer spending, as well as climate and weather patterns, could have an impact on the markets in which we currently or will in the future operate. In addition, our Entertainment Golf business could be impacted on a season-to-season basis, based upon corporate event and social gatherings during peak and off-peak times.
Traditional Golf Business
Our Traditional Golf business is subject to trends in consumer discretionary spending, as well as climate and weather patterns, which has a significant impact on the markets in which we operate. Traditional Golf is generally subject to seasonal fluctuations caused by significant reductions in golf activities due to shorter days and colder temperatures in the first and fourth quarters of each year. Consequently, a significantly larger portion of our revenue from our Traditional Golf operations is earned in the second and third quarters of our fiscal year. In addition, severe weather patterns can also negatively impact our results of operations.
While consumer spending in the Traditional Golf industry has not grown in recent years, we believe improving economic conditions and improvements in local housing markets have helped and will continue to help drive membership growth and increase the number of golf rounds played. In addition, we believe growth in related industries, including leisure, fitness and entertainment, may positively impact our Traditional Golf business.
Application of Critical Accounting Policies
Management’s discussion and analysis of financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles or GAAP. The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that could affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses.
Our estimates are based on information available to management at the time of preparation of the Consolidated Financial Statements, including the result of historical analysis, our understanding and experience of the Company’s operations, our knowledge of the industry and market-participant data available to us.
Actual results have historically been in line with management’s estimates and judgments used in applying each of the accounting policies described below and management periodically re-evaluates accounting estimates and assumptions. Actual results could differ from these estimates and materially impact our Consolidated Financial Statements. However, the Company does not expect our assessments and assumptions below to materially change in the future.
A summary of our significant accounting policies is presented in Note 2 to our Consolidated Financial Statements, which appear in Part II, Item 8. “Financial Statements and Supplementary Data.” The following is a summary of our accounting policies that are most affected by judgments, estimates and assumptions.
Impairment of Property and Equipment and Intangible Assets
Long-lived property, equipment and definite-lived intangible assets are tested for potential impairment when changes in circumstances indicate the carrying amount of the assets, or other appropriate grouping of assets, may not be fully recoverable. Indicators of impairment include material adverse changes in the projected revenues and expenses, significant underperformance relative to historical or projected future operating results, and significant negative industry or economic trends. An impairment is determined to have occurred if the future net undiscounted cash flows expected to be generated is less than the carrying value of an asset. The impairment is measured as the difference between the carrying value and the fair value. Significant judgment is required both in determining impairment and in estimating the fair value. We may use assumptions and estimates derived from a review of our operating results, business projections, expected growth rates, discount rates, and tax rates. We also make certain assumptions about future economic conditions, interest rates, and other market data. Many of the factors used in these assumptions and estimates are outside the control of management, and can change in future periods.
Membership Deposit Liabilities
In our Traditional Golf business, private country club members generally pay an advance initiation fee deposit upon their acceptance as a member to the their country club. Initiation fee deposits are refundable 30 years after the date of acceptance as a member. The difference between the initiation fee deposit paid by the member and the present value of the refund obligation is deferred and recognized into revenue in the Consolidated Statements of Operations on a straight-line basis over the expected life of an active membership, which is estimated to be seven years. The determination of the estimated average expected life of an active membership is based on company-specific historical data and involves judgment and estimation. The present value of the refund obligation is recorded as a membership deposit liability in the Consolidated Balance Sheets and accretes over a 30-year nonrefundable term using the effective interest method. This accretion is recorded as interest expense, net in the Consolidated Statements of Operations.
Valuation of Securities
Fair value of securities is based on an internal model and involves significant judgment. The inputs to our model includes discount rates, prepayment speeds, default rates and severity assumptions.
See Note 10 to our Consolidated Financial Statements in Part II, Item 8. “Financial Statements and Supplementary Data” for information regarding the fair value of our investments, and respective estimation methodologies, as of December 31, 2019.
Impairment of Securities and Other Investments
Temporary declines in value generally result from changes in market factors, such as market interest rates and credit spreads, or from certain macroeconomic events, including market disruptions and supply changes, which do not directly impact our ability to collect amounts contractually due. We continually evaluate the credit status of each of our securities and the collateral supporting our securities. These factors are also analyzed in relation to the amount of the unrealized loss and the period elapsed since it was incurred. The result of this evaluation is considered when determining management’s estimate of cash flows, particularly with respect to developing the necessary inputs and assumptions. Unrealized losses that are considered other-than-temporary are recognized in earnings. Significant judgment is required in this analysis.
We evaluate our other investments for impairment whenever events or changes in circumstances indicate that the carrying amount might not be recoverable. The evaluation of recoverability is based on management’s assessment of the financial condition and near term prospects of the commercial real estate project, the length of time and the extent to which the market value of the investment has been less than cost, availability and cost of financing, demand for space, competition for tenants, changes in market rental rates, and operating costs. As these factors are difficult to predict and are subject to future events that may alter management’s
assumptions, the values estimated by management in its recoverability analyses may not be realized, and actual losses or impairment may be realized in the future.
Stock-based Compensation
We account for stock-based compensation for options in accordance with the fair value recognition provisions, under which we use the Black-Scholes option valuation model, which requires the input of subjective assumptions. These assumptions include expected volatility, expected dividend yield of our stock, expected term of the awards and the risk-free interest rate.
Recent Accounting Pronouncements
See Note 2 in Part II, Item 8. “Financial Statements and Supplementary Data” for information about recent accounting pronouncements.
Results of Operations
The following tables summarize the changes in our consolidated results of operations from year-to-year (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of Results of Operations for the years ended December 31, 2019 and 2018
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Increase (Decrease)
|
|
2019
|
|
2018
|
|
Amount
|
|
%
|
Revenues
|
|
|
|
|
|
|
|
|
Golf operations (A)
|
$
|
216,497
|
|
|
$
|
244,646
|
|
|
$
|
(28,149
|
)
|
|
(11.5
|
)%
|
Sales of food and beverages
|
55,567
|
|
|
69,723
|
|
|
(14,156
|
)
|
|
(20.3
|
)%
|
Total revenues
|
272,064
|
|
|
314,369
|
|
|
(42,305
|
)
|
|
(13.5
|
)%
|
|
|
|
|
|
|
|
|
|
Operating costs
|
|
|
|
|
|
|
|
|
|
Operating expenses (A)
|
229,306
|
|
|
251,794
|
|
|
(22,488
|
)
|
|
(8.9
|
)%
|
Cost of sales - food and beverages
|
15,217
|
|
|
20,153
|
|
|
(4,936
|
)
|
|
(24.5
|
)%
|
General and administrative expense
|
47,976
|
|
|
38,560
|
|
|
9,416
|
|
|
24.4
|
%
|
Depreciation and amortization
|
22,396
|
|
|
19,704
|
|
|
2,692
|
|
|
13.7
|
%
|
Pre-opening costs
|
9,040
|
|
|
2,483
|
|
|
6,557
|
|
|
264.1
|
%
|
Impairment and other losses
|
15,413
|
|
|
8,240
|
|
|
7,173
|
|
|
87.1
|
%
|
Realized and unrealized (gain) loss on investments
|
—
|
|
|
(131
|
)
|
|
131
|
|
|
(100.0
|
)%
|
Total operating costs
|
339,348
|
|
|
340,803
|
|
|
(1,455
|
)
|
|
(0.4
|
)%
|
Operating loss
|
(67,284
|
)
|
|
(26,434
|
)
|
|
40,850
|
|
|
154.5
|
%
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
Interest and investment income
|
955
|
|
|
1,794
|
|
|
(839
|
)
|
|
(46.8
|
)%
|
Interest expense, net
|
(8,760
|
)
|
|
(16,639
|
)
|
|
(7,879
|
)
|
|
(47.4
|
)%
|
Other income, net
|
20,876
|
|
|
2,880
|
|
|
17,996
|
|
|
N.M.
|
|
Total other income (expenses)
|
13,071
|
|
|
(11,965
|
)
|
|
25,036
|
|
|
209.2
|
%
|
|
|
|
|
|
|
|
|
Loss before income tax
|
$
|
(54,213
|
)
|
|
$
|
(38,399
|
)
|
|
$
|
15,814
|
|
|
41.2
|
%
|
N.M. – Not meaningful
|
|
(A)
|
Includes $52.4 million and $22.1 million for the years ended December 31, 2019 and 2018, respectively, due to management contract reimbursements reported under the new revenue standard.
|
Revenues from Golf Operations
Revenues from golf operations decreased by $28.1 million during the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily due to decreases of: (i) $66.6 million related to fewer Traditional Golf properties owned or operated in 2019, (ii) $3.1 million of greens fees and cart rental fees for Traditional Golf properties operating in both periods, primarily related to unfavorable weather conditions in early 2019, and (iii) $0.5 million driven by fewer events at our Traditional Golf properties, partially offset by an increase of (iv) $33.4 million in revenues from management contracts including $30.3 million of reimbursed expenses, (v) $1.6 million related to increases in The Players' Club memberships, (vi) $1.6 million related to increases in dues at private golf properties, and (vii) $5.6 million in our Entertainment Golf business due to three new venues that opened in 2019.
Sales of Food and Beverages
Sales of food and beverages decreased by $14.2 million during the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily due to decreases of: (i) $21.1 million due to fewer Traditional Golf properties owned or operated in 2019 and (ii) $2.3 million driven by fewer events at our Traditional Golf properties, partially offset by an increase of (iii) $9.2 million in our Entertainment Golf business due to three new venues that opened in 2019.
Operating Expenses
Operating expenses decreased by $22.5 million during the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily due to decreases of: (i) $64.7 million due to fewer Traditional Golf properties owned or operated in 2019, (ii) $1.4 million due to decreased utility and water usage, partially offset by increases of: (iii) $30.3 million of reimbursed expenses from management contracts, (iv) $2.0 million in Traditional Golf repairs and maintenance expenses due to the benefit of insurance proceeds recorded in 2018, (v) $0.5 million in payroll expense primarily due to an increase in California minimum wage, and (vi) $11.0 million in our Entertainment Golf business due to three new venues that opened in 2019.
Cost of Sales - Food and Beverages
Cost of sales - food and beverages decreased by $4.9 million during the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily due to decreases of: (i) $7.0 million due to fewer Traditional Golf properties owned or operated in 2019 and (ii) $0.2 million due to lower sales volumes for Traditional Golf properties operating in both periods, partially offset by (iii) an increase of $2.3 million in our Entertainment Golf Business due to three new venues that opened in 2019.
General and Administrative Expense (including Acquisition and Transaction Expense)
General and administrative expense increased by $9.4 million during the year ended December 31, 2019 compared to the year ended December 31, 2018 due to increases of: (i) $5.2 million of higher payroll and payroll related expenses primarily related to the hiring of employees in our Entertainment Golf segment, (ii) $1.3 million of higher travel and other related expenses as part of the development of the Entertainment Golf business, (iii) $0.6 million of expenses associated with Entertainment Golf sites that we are no longer pursuing, (iv) $0.5 million of higher rent and related office expenses associated with our corporate offices in New York and Dallas, (v) $1.0 million of higher marketing expenses primarily related to the re-branding of our Entertainment Golf business in 2019, and (vi) $0.7 million of higher costs primarily related to the negotiation and development of potential Entertainment Golf venue locations.
Depreciation and Amortization
Depreciation and amortization increased by $2.7 million during the year ended December 31, 2019 compared to the year ended December 31, 2018 due to increases of: (i) $2.9 million in depreciation on assets placed into service in our Entertainment Golf business for our Orlando, Florida venue in April 2018 and for our three venues in Raleigh, North Carolina; Richmond, Virginia; and West Palm Beach, Florida in August, September and October 2019, respectively, (ii) $1.1 million due to amortization on additional finance leases for equipment, and (iii) depreciation on additional assets placed in service at Traditional Golf properties, partially offset by (iv) a $1.8 million reduction in depreciation due to Traditional Golf properties that were exited in 2018 and 2019.
Pre-Opening Costs
Pre-opening costs increased by $6.6 million during the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily due to costs associated with the opening of three new Entertainment Golf venues in 2019 compared to one venue opened in 2018. Pre-opening costs can fluctuate based on timing of venue openings and geographic locations.
Impairment and Other Losses
During the year ended December 31, 2019, impairment consisted of: (i) $1.2 million on three Traditional Golf properties that were classified as held-for-sale and subsequently sold, (ii) $3.8 million on two leased Traditional Golf properties, (iii) $10.2 million of losses on asset retirements of certain software and equipment as a result of the decision to discontinue use at our Entertainment Golf venues, and (iv) $0.2 million of losses on asset retirements in our Traditional Golf business. During the year ended December 31, 2018, impairment consisted primarily of $7.0 million due to impairment on five Traditional Golf properties that were classified as held-for-sale and $0.9 million on three leased Traditional Golf properties.
Realized and Unrealized (Gain) Loss on Investments
During the year ended December 31, 2018, we recorded a net realized gain on the mark-to-market value of a derivative, which was unwound in December 2018.
Interest and Investment Income
Interest and investment income decreased by $0.8 million during the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily due to lower balances in interest bearing cash accounts.
Interest Expense, net
Interest expense, net decreased by $7.9 million during the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily due to a decrease of $8.0 million related to the Traditional Golf loan payoff in December 2018, partially offset by an increase of interest expense capitalized into construction in progress balances associated with the opening of three Entertainment Golf venues in 2019.
Other Income, Net
Other income, net increased by $18.0 million during the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily due to: (i) $10.6 million in higher gains from sale of Traditional Golf properties, (ii) $0.9 million of losses recognized during the year ended December 31, 2018 related to Traditional Golf lease modifications and terminations, (iii) $5.3 million of losses recognized during the year ended December 31, 2018 primarily due to a $4.9 million settlement of a legal dispute related to the exit of a Traditional Golf leased course, and (iv) $1.3 million in lower losses on the extinguishment of debt primarily due to the payoff of a Traditional Golf loan in December 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of Results of Operations for the years ended December 31, 2018 and 2017
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Increase (Decrease)
|
|
2018
|
|
2017
|
|
Amount
|
|
%
|
Revenues
|
|
|
|
|
|
|
|
Golf operations (A)
|
$
|
244,646
|
|
|
$
|
221,737
|
|
|
$
|
22,909
|
|
|
10.3
|
%
|
Sales of food and beverages
|
69,723
|
|
|
70,857
|
|
|
(1,134
|
)
|
|
(1.6
|
)%
|
Total revenues
|
314,369
|
|
|
292,594
|
|
|
21,775
|
|
|
7.4
|
%
|
|
|
|
|
|
|
|
|
Operating costs
|
|
|
|
|
|
|
|
Operating expenses (A)
|
251,794
|
|
|
232,796
|
|
|
18,998
|
|
|
8.2
|
%
|
Cost of sales - food and beverages
|
20,153
|
|
|
20,959
|
|
|
(806
|
)
|
|
(3.8
|
)%
|
General and administrative expense
|
38,560
|
|
|
31,413
|
|
|
7,147
|
|
|
22.8
|
%
|
Management fee and termination payment to affiliate
|
—
|
|
|
21,410
|
|
|
(21,410
|
)
|
|
(100.0
|
)%
|
Depreciation and amortization
|
19,704
|
|
|
24,304
|
|
|
(4,600
|
)
|
|
(18.9
|
)%
|
Pre-opening costs
|
2,483
|
|
|
320
|
|
|
2,163
|
|
|
N.M.
|
|
Impairment and other losses
|
8,240
|
|
|
60
|
|
|
8,180
|
|
|
N.M.
|
|
Realized and unrealized (loss) gain on investments
|
(131
|
)
|
|
6,243
|
|
|
(6,374
|
)
|
|
(102.1
|
)%
|
Total operating costs
|
340,803
|
|
|
337,505
|
|
|
3,298
|
|
|
1.0
|
%
|
Operating loss
|
(26,434
|
)
|
|
(44,911
|
)
|
|
(18,477
|
)
|
|
(41.1
|
)%
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
Interest and investment income
|
1,794
|
|
|
23,162
|
|
|
(21,368
|
)
|
|
(92.3
|
)%
|
Interest expense, net
|
(16,639
|
)
|
|
(19,581
|
)
|
|
(2,942
|
)
|
|
(15.0
|
)%
|
Other income, net
|
2,880
|
|
|
94
|
|
|
2,786
|
|
|
N.M.
|
|
Total other income (expenses)
|
(11,965
|
)
|
|
3,675
|
|
|
(15,640
|
)
|
|
(425.6
|
)%
|
|
|
|
|
|
|
|
|
Loss before income tax
|
$
|
(38,399
|
)
|
|
$
|
(41,236
|
)
|
|
$
|
2,837
|
|
|
6.9
|
%
|
N.M. – Not meaningful
|
|
(A)
|
Includes $22.1 million for the year ended December 31, 2018 due to management contract reimbursements reported under the new revenue standard adopted on January 1, 2018.
|
Revenues from Golf Operations
Revenues from golf operations decreased by $22.9 million during the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily due to increases of: (i) $22.1 million due to management contract reimbursements reported on a gross basis under the new revenue standard adopted prospectively on January 1, 2018, (ii) $6.6 million of improvements in the Traditional Golf business for properties in operation at both December 31, 2018 and December 31, 2017 including growth in members and in rounds played, and (iii) $2.2 million related to our Entertainment Golf venue opened in Orlando, Florida in 2018, partially offset by a decrease of $7.9 million as a result of fewer Traditional Golf properties owned or operated in 2018.
Sales of Food and Beverages
Sales of food and beverages decreased by $1.1 million during the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily due to a decrease of $4.1 million as a result of fewer Traditional Golf properties owned or operated in 2018, partially offset by an increase of $2.7 million related to our Entertainment Golf venue opened in Orlando, Florida in 2018 and a $0.3 million increase in the Traditional Golf business for properties in operation at both December 31, 2018 and December 31, 2017
Operating Expenses
Operating expenses decreased by $19.0 million during the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily due to increases of: (i) $22.1 million in management contract expenses reported under the new revenue standard adopted on January 1, 2018, (ii) $5.4 million related to our Entertainment Golf venue opened in Orlando, Florida in 2018, partially offset by (iii) a decrease of $8.5 million due to fewer Traditional Golf properties owned or operated in 2018.
Cost of Sales - Food and Beverages
Cost of sales - food and beverages decreased by $0.8 million during the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily due to a $1.4 million decrease in the Traditional Golf business for properties no longer owned or operated as of December 31, 2018, partially offset by $0.6 million of food and beverage costs incurred at our Entertainment Golf venue opened in Orlando, Florida in 2018.
General and Administrative Expense (including Acquisition and Transaction Expense)
General and administrative expense increased by $7.1 million during the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily due to payroll-related expenses in our Entertainment Golf and corporate segments as a result of the Internalization effective January 1, 2018.
Management Fee and Termination Payment to Affiliate
Management fee and termination payment to affiliate increased $21.4 million during the year ended December 31, 2018 compared to the year ended December 31, 2017 due to the Internalization effective January 1, 2018.
Depreciation and Amortization
Depreciation and amortization expense decreased by $4.6 million during the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily due to discontinuation of depreciation on the Traditional Golf real estate assets classified as held-for-sale in March 2018, partially offset by depreciation on assets placed into service at our Entertainment Golf venue in Orlando, Florida.
Pre-Opening Costs
Pre-opening costs were $2.5 million during the year ended December 31, 2018 compared to $0.3 million during the year ended December 31, 2017. Pre-opening costs in 2018 were primarily due to: (i) payroll-related expenses incurred in connection with the opening of our Entertainment Golf venue in Orlando, Florida in April 2018 and (ii) pre-opening rent expense for three additional Entertainment Golf venues under construction as of December 31. 2018.
Impairment and Other Losses
Impairment and other losses increased by $8.2 million during the year ended December 31, 2018 compared to a loss during the year ended December 31, 2017. Impairment in 2018 consisted primarily of $7.0 million due to impairment on five Traditional Golf properties that were held-for-sale in March 2018 and on three under-performing Traditional Golf properties.
Realized and Unrealized (Gain) Loss on Investments
The realized and unrealized (gain) loss on investments increased by $6.4 million during the year ended December 31, 2018 compared to the year ended December 31, 2017. During the year ended December 31, 2018, we recorded a net realized gain on the mark-to-market value of derivatives. During the year ended December 31, 2017, we recorded a net realized loss of $0.4 million on the sale of agency RMBS, an unrealized loss of $0.6 million on the mark-to-market of agency RMBS, a realized loss of $4.7 million on the sale of derivatives and an unrealized loss of $0.7 million on the mark-to-market on the value of derivatives.
Interest and Investment Income
Interest and investment income decreased by $21.4 million during the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily due to decreases of: (i) $8.0 million in interest income earned from agency RMBS which were sold in August 2017, (ii) $5.5 million on the accretion of discount recognized on a resorts-related loan, (iii) $8.5 million of paid-in-kind interest earned on a resorts-related loan due to the full repayment in August 2017, partially offset by (iii) $0.6 million in interest earned on overnight cash deposits.
Interest Expense, Net
Interest expense, net decreased by $2.9 million during the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily due to a decrease in interest expense related to repurchase agreements on agency RMBS which were repaid in August 2017.
Other Income, Net
Other income, net increased by $2.8 million during the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily due to: (i) a $9.0 million increase primarily due to gain on sales of long-lived assets and intangibles partially offset by (ii) $0.8 million in higher losses on Traditional Golf lease modifications and terminations, (iii) $1.2 million in higher losses on debt extinguishment and (iii) $4.3 million of higher losses primarily due to the settlement of a legal dispute and related discharge of liabilities assumed by the counterparty to the settlement.
Liquidity and Capital Resources
Overview
Our primary sources of liquidity are our current balances of cash and cash equivalents. We also generated capital through the completion of the sales of 24 of our 26 owned Traditional Golf properties which was completed by December 31, 2019, as well as strategically optimizing the monetization of substantially all our debt investments in loans and securities, which was completed by December 31, 2017. The proceeds generated by these transactions were reinvested in our Entertainment Golf business and used to pay overhead expenses.
As of December 31, 2019, we had $28.4 million of available cash, including $10.5 million of cash from the Traditional Golf business.
Our primary cash needs are capital expenditures for developing and opening new core Drive Shack and new small-store urban box venues, remodeling and maintaining existing facilities, funding working capital, operating and finance lease obligations, servicing our debt obligations, paying dividends on our preferred stock, and for general corporate purposes.
The Company’s growth strategy is capital intensive and our ability to execute is dependent upon many factors, including the current and future operating performance of our Entertainment Golf venues and Traditional Golf properties, the pace of expansion, real estate markets, site locations, our ability to raise financing and the nature of the arrangements negotiated with landlords. Based upon current levels of operations and anticipated growth, we expect that cash flows from operations, combined with other financing alternatives in place or available, and further combined with the asset sales, as discussed below, will be sufficient to meet our working capital and capital expenditure requirements for the foreseeable future.
As of December 31, 2019, we are actively exploring additional debt financing to meet our short and long-term liquidity requirements to fund our planned growth, including new venue development and construction, product innovation, and general corporate needs. Our financial objectives include diversifying our financing sources, optimizing the mix and maturity of new debt financings, public or private equity issuances, strategically monetizing our remaining real estate securities and other investments, and the sales of our remaining owned Traditional Golf properties. We continually monitor market conditions for these financing and capital opportunities, and at any given time, may enter into or pursue one or more of the transactions described above. However, we cannot ensure that capital will be available on reasonable terms, if at all.
For a further discussion of risks that could affect our liquidity, access to capital resources and our capital obligations, see Part I, Item 1A. “Risk Factors” above.
Summary of Cash Flows
The following table and discussion summarize our key cash flows from operating, investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Net cash (used in) provided by:
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(28,118
|
)
|
|
$
|
(7,202
|
)
|
|
$
|
(12,375
|
)
|
Investing activities
|
|
(11,993
|
)
|
|
25,929
|
|
|
656,566
|
|
Financing activities
|
|
(10,744
|
)
|
|
(109,596
|
)
|
|
(617,047
|
)
|
Net (Decrease) Increase in Cash and Cash Equivalents, Restricted Cash and Restricted Cash, noncurrent
|
|
$
|
(50,855
|
)
|
|
$
|
(90,869
|
)
|
|
$
|
27,144
|
|
Operating Activities
Cash flows used in operating activities consist primarily of net losses adjusted for certain items including depreciation and amortization of assets, amortization of prepaid golf member dues, impairment losses, other gains and losses from the sale of assets, stock-based compensation expense, and the effect of changes in operating assets and liabilities.
Net cash flow used in operating activities changed from $7.2 million for the year ended December 31, 2018 to $28.1 million for the year ended December 31, 2019. It changed from $12.4 million for the year ended December 31, 2017 to $7.2 million for the year ended December 31, 2018. These changes resulted primarily from the factors described below:
2019 compared to 2018
|
|
•
|
Operating cash flows decreased by:
|
|
|
◦
|
$9.9 million of general and administrative expenses due to increased headcount and professional fees primarily due to the development of the Entertainment Golf business; and
|
|
|
◦
|
$10.1 million due to decreased revenue from the Traditional Golf business due to the sale of properties during 2019; and
|
|
|
◦
|
$4.4 million of pre-open costs primarily due to the opening of three Entertainment Golf venues in 2019 compared to one venue opened in 2018.
|
|
|
•
|
Operating cash flows increased by:
|
|
|
◦
|
$1.8 million due to management fees paid in 2018 that were incurred in 2017 when the Company was externally managed; and
|
|
|
◦
|
$1.7 million in operating cash flows primarily due to the opening of Entertainment Golf venues in Raleigh, North Carolina, Richmond, Virginia and West Palm Beach, Florida.
|
2018 compared to 2017
|
|
•
|
Operating cash flows increased by:
|
|
|
◦
|
$18.7 million due to lower management fees paid in 2018 as a result of the Internalization;
|
|
|
◦
|
$4.1 million due to lower general and professional fees paid in 2018 ;
|
|
|
◦
|
$1.7 million due to lower income taxes paid in 2018; and
|
|
|
◦
|
$0.6 million due to higher interest earned on overnight cash deposits.
|
|
|
•
|
Operating cash flows decreased by:
|
|
|
◦
|
$5.0 million in lower operating cash flows from Traditional Golf, primarily related to the legal dispute settled in July 2018;
|
|
|
◦
|
$7.5 million of payroll costs primarily due to the Internalization and increased employee hiring associated with the Entertainment Golf business;
|
|
|
◦
|
$0.1 million due to cash flows from operations from the first Entertainment Golf venue in Orlando; and
|
|
|
◦
|
$7.9 million in lower net interest proceeds primarily due to the sale of agency RMBS in August 2017.
|
Investing Activities
Cash flows generated from investing activities primarily relate to proceeds from the dispositions of Traditional Golf properties, sales of and repayments from investments in securities and loans, and were primarily used for capital expenditures related to the development of the Entertainment Golf venues, renovations of existing facilities and payments for settlement of derivatives.
Cash used in investing activities decreased by $37.9 million in 2019 compared to 2018. Cash provided by investing activities decreased by $630.6 million in 2018 compared to 2017.
Capital Expenditures. Our total capital expenditures for 2019, 2018, and 2017 was $74.9 million, $62.4 million, and $34.3 million, respectively.
We expect our capital expenditures over the next 12 months to range between $70 and $80 million, which includes developing new core Drive Shack and small-store format urban box venues and remodeling and maintaining existing facilities.
Traditional Golf property dispositions. As of December 31, 2019, we have successfully sold 24 of our 26 owned golf properties for a total aggregate sales price of $169.7 million, of which $62.9 million and $88.3 million was received, net of transaction costs, in 2019 and 2018, respectively. We continue to own two Traditional Golf properties, of which one is classified as held-for-sale and one is classified as held-for-use. We continue to pursue the monetization of our owned golf property to generate capital for reinvestment in the Entertainment Golf business.
Other Investments. In connection with the transformation of the Company to a leisure and “eatertainment” company, the Company monetized its debt investments in loans and securities through repayments and sales, and settlement of derivatives, which was substantially completed by December 31, 2017.
Financing Activities
Cash flows used in or provided by financing activities consist primarily of cash from the borrowing or repayment of debt obligations, deposits made on, or the return of, margin calls related to our repurchase agreements and derivatives, deposits received on golf memberships, and the payment of common and preferred dividends.
Cash used in financing activities decreased by $98.9 million in 2019 compared to 2018. Cash used in financing activities decreased by $507.5 million in 2018 compared to 2017.
Dividends. The Company has paid dividends to its preferred shareholders in the amount of $5.6 million in 2019, 2018, and 2017, respectively. The Company has an ongoing obligation to satisfy the distribution requirements of the preferred shares, in accordance with the terms of the issuance. Effective January 1, 2017, the Company revoked its election to be treated as a REIT for federal income tax purposes. As a result, we are no longer subject to the distribution requirements applicable to REITs, and the timing and amount of distributions are in the sole discretion of our board of directors, which has elected not to declare common stock dividends for 2017 through 2019 to retain capital for growth. A common stock dividend of $8.0 million was declared in 2016 and paid in 2017.
Debt Obligations and Derivatives. The Company made contractual payments on its finance leases in 2019, 2018 and 2017. In 2018, the Company repaid the Traditional Golf loan using proceeds from the sale of Traditional Golf properties. In connection with the transformation of the Company to a leisure and “eatertainment” company, the Company monetized its debt investments in loans and securities and repaid associated debt obligations and terminated associated derivatives in 2017.
Golf Membership Deposits. Private country club members generally pay an advance initiation fee deposit upon their acceptance as a member to the respective country club, which are refundable 30 years after the date of acceptance as a member.
Debt Instruments
See Note 8 in Part II, Item 8. “Financial Statements and Supplementary Data” for further information related to our debt obligations and contractual maturities as of December 31, 2019.
Off-Balance Sheet Arrangements
As of December 31, 2019, we had the following material off-balance sheet arrangements. We believe that these off-balance sheet structures presented the most efficient and least expensive form of financing for these assets at the time they were entered, and represented the most common market-accepted method for financing such assets.
|
|
•
|
In April 2006, we securitized Subprime Portfolio I. The loans were sold to a securitization trust, of which 80% were treated as a sale, which is an off-balance sheet financing.
|
|
|
•
|
In July 2007, we securitized Subprime Portfolio II. The loans were sold to a securitization trust, of which 90% were treated as a sale, which is an off-balance sheet financing.
|
We have no obligation to repurchase any loans from either of our subprime securitizations. Therefore, it is expected that our exposure to loss is limited to the carrying amount of our retained interests in the securitization entities, in the amount of $3.1 million as of December 31, 2019. A subsidiary of ours gave limited representations and warranties with respect to the second securitization; however, it has no assets and does not have recourse to the general credit of the Company.
Contractual Obligations
The following table summarizes our contractual arrangements as of December 31, 2019, and the timing and effect that such commitments are expected to have on our liquidity and capital requirements in future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed and Determinable Payments Due by Period
|
Contract
|
|
2020
|
|
2021-2022
|
|
2023-2024
|
|
Thereafter
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Finance lease obligations - Equipment (A)
|
|
7,222
|
|
|
10,171
|
|
|
4,302
|
|
|
33
|
|
|
21,728
|
|
Junior subordinated notes payable (A)
|
|
2,182
|
|
|
4,364
|
|
|
4,364
|
|
|
73,372
|
|
|
84,282
|
|
Operating lease obligations (B)
|
|
33,151
|
|
|
63,648
|
|
|
55,826
|
|
|
205,108
|
|
|
357,733
|
|
Membership deposit liabilities (C)
|
|
10,869
|
|
|
7,229
|
|
|
9,406
|
|
|
218,512
|
|
|
246,016
|
|
Credit facilities, Traditional Golf (A)
|
|
6
|
|
|
11
|
|
|
11
|
|
|
306
|
|
|
334
|
|
Total
|
|
$
|
53,430
|
|
|
$
|
85,423
|
|
|
$
|
73,909
|
|
|
$
|
497,331
|
|
|
$
|
710,093
|
|
|
|
(A)
|
Includes interest based on rates existing at December 31, 2019 and assumes no prepayments. Obligations that are repayable prior to maturity at our option are reflected at their contractual maturity dates. See Note 8 to our Consolidated Financial Statements for further discussions.
|
|
|
(B)
|
Includes leases of golf courses and related facilities, carts and equipment. Excludes escalation charges which per our lease agreements are not fixed and determinable payments. Also excludes four month-to-month property leases which are cancellable by the parties with 30 days written notice and various month-to-month operating leases for carts and equipment. The aggregate monthly expense of these leases was $0.2 million. See Notes 2 and 6 to our Consolidated Financial Statements for further discussions.
|
|
|
(C)
|
Amounts represent gross initiation fee deposits refundable 30 years after the date of acceptance of a member. See Notes 2 and 13 to our Consolidated Financial Statements for further discussion.
|
|
|
(D)
|
Includes primarily ground leases for Entertainment Golf venues. See Notes 2 and 6 to our Consolidated Financial Statements for further discussions.
|
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements:
Reports of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets as of December 31, 2019 and December 31, 2018.
Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017.
Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017.
Consolidated Statements of Changes in Equity for the years ended December 31, 2019, 2018 and 2017.
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017.
Notes to Consolidated Financial Statements.
All schedules have been omitted because either the required information is included in our Consolidated Financial Statements and notes thereto or it is not applicable.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Drive Shack Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Drive Shack Inc. and Subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 6, 2020 expressed unqualified opinion thereon.
Adoption of Accounting Standards Update (ASU) No. 2016-02
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of ASU No. 2016-02, Leases (Topic 842), and the related amendments.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2000.
New York, New York
March 6, 2020
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Drive Shack Inc. and Subsidiaries
Opinion on Internal Control Over Financial Reporting
We have audited Drive Shack Inc. and Subsidiaries’ internal controls over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Drive Shack Inc. and Subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2019 consolidated financial statements of the Company and our report dated March 6, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
New York, New York
March 6, 2020
DRIVE SHACK INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Assets
|
|
|
|
Current Assets
|
|
|
|
Cash and cash equivalents
|
$
|
28,423
|
|
|
$
|
79,235
|
|
Restricted cash
|
3,103
|
|
|
3,326
|
|
Accounts receivable, net
|
5,249
|
|
|
7,518
|
|
Real estate assets, held-for-sale, net
|
16,948
|
|
|
75,862
|
|
Real estate securities, available-for-sale
|
3,052
|
|
|
2,953
|
|
Other current assets
|
17,521
|
|
|
20,505
|
|
Total Current Assets
|
74,296
|
|
|
189,399
|
|
Restricted cash, noncurrent
|
438
|
|
|
258
|
|
Property and equipment, net of accumulated depreciation
|
179,641
|
|
|
132,605
|
|
Operating lease right-of-use assets
|
215,308
|
|
|
—
|
|
Intangibles, net of accumulated amortization
|
17,565
|
|
|
48,388
|
|
Other investments
|
24,020
|
|
|
22,613
|
|
Other assets
|
4,723
|
|
|
8,684
|
|
Total Assets
|
$
|
515,991
|
|
|
$
|
401,947
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
Current Liabilities
|
|
|
|
Obligations under finance leases
|
$
|
6,154
|
|
|
$
|
5,489
|
|
Membership deposit liabilities
|
10,791
|
|
|
8,861
|
|
Accounts payable and accrued expenses
|
25,877
|
|
|
45,284
|
|
Deferred revenue
|
26,268
|
|
|
18,793
|
|
Real estate liabilities, held-for-sale
|
4
|
|
|
2,947
|
|
Other current liabilities
|
23,964
|
|
|
22,285
|
|
Total Current Liabilities
|
93,058
|
|
|
103,659
|
|
Credit facilities and obligations under finance leases - noncurrent
|
13,125
|
|
|
10,489
|
|
Operating lease liabilities - noncurrent
|
187,675
|
|
|
—
|
|
Junior subordinated notes payable
|
51,192
|
|
|
51,200
|
|
Membership deposit liabilities, noncurrent
|
95,805
|
|
|
90,684
|
|
Deferred revenue, noncurrent
|
6,283
|
|
|
6,016
|
|
Other liabilities
|
3,278
|
|
|
5,232
|
|
Total Liabilities
|
$
|
450,416
|
|
|
$
|
267,280
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
Preferred stock, $0.01 par value, 100,000,000 shares authorized, 1,347,321 shares of 9.75% Series B Cumulative Redeemable Preferred Stock, 496,000 shares of 8.05% Series C Cumulative Redeemable Preferred Stock, and 620,000 shares of 8.375% Series D Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share, issued and outstanding as of December 31, 2019 and 2018
|
$
|
61,583
|
|
|
$
|
61,583
|
|
Common stock, $0.01 par value, 1,000,000,000 shares authorized, 67,068,751 and 67,027,104 shares issued and outstanding at December 31, 2019 and 2018, respectively
|
671
|
|
|
670
|
|
Additional paid-in capital
|
3,177,183
|
|
|
3,175,843
|
|
Accumulated deficit
|
(3,175,572
|
)
|
|
(3,105,307
|
)
|
Accumulated other comprehensive income
|
1,710
|
|
|
1,878
|
|
Total Equity
|
$
|
65,575
|
|
|
$
|
134,667
|
|
|
|
|
|
Total Liabilities and Equity
|
$
|
515,991
|
|
|
$
|
401,947
|
|
See notes to Consolidated Financial Statements.
DRIVE SHACK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 and 2017
(dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Revenues
|
|
|
|
|
|
Golf operations
|
$
|
216,497
|
|
|
$
|
244,646
|
|
|
$
|
221,737
|
|
Sales of food and beverages
|
55,567
|
|
|
69,723
|
|
|
70,857
|
|
Total revenues
|
272,064
|
|
|
314,369
|
|
|
292,594
|
|
Operating costs
|
|
|
|
|
|
Operating expenses
|
229,306
|
|
|
251,794
|
|
|
232,796
|
|
Cost of sales - food and beverages
|
15,217
|
|
|
20,153
|
|
|
20,959
|
|
General and administrative expense
|
47,976
|
|
|
38,560
|
|
|
31,413
|
|
Management fee and termination payment to affiliate
|
—
|
|
|
—
|
|
|
21,410
|
|
Depreciation and amortization
|
22,396
|
|
|
19,704
|
|
|
24,304
|
|
Pre-opening costs
|
9,040
|
|
|
2,483
|
|
|
320
|
|
Impairment and other losses
|
15,413
|
|
|
8,240
|
|
|
60
|
|
Realized and unrealized (gain) loss on investments
|
—
|
|
|
(131
|
)
|
|
6,243
|
|
Total operating costs
|
339,348
|
|
|
340,803
|
|
|
337,505
|
|
Operating loss
|
(67,284
|
)
|
|
(26,434
|
)
|
|
(44,911
|
)
|
Other income (expenses)
|
|
|
|
|
|
Interest and investment income
|
955
|
|
|
1,794
|
|
|
23,162
|
|
Interest expense, net
|
(8,760
|
)
|
|
(16,639
|
)
|
|
(19,581
|
)
|
Other income, net
|
20,876
|
|
|
2,880
|
|
|
94
|
|
Total other income (expenses)
|
13,071
|
|
|
(11,965
|
)
|
|
3,675
|
|
Loss before income tax
|
(54,213
|
)
|
|
(38,399
|
)
|
|
(41,236
|
)
|
Income tax expense
|
641
|
|
|
284
|
|
|
965
|
|
Net Loss
|
(54,854
|
)
|
|
(38,683
|
)
|
|
(42,201
|
)
|
Preferred dividends
|
(5,580
|
)
|
|
(5,580
|
)
|
|
(5,580
|
)
|
Loss Applicable To Common Stockholders
|
$
|
(60,434
|
)
|
|
$
|
(44,263
|
)
|
|
$
|
(47,781
|
)
|
|
|
|
|
|
|
Loss Applicable to Common Stock, per share
|
|
|
|
|
|
Basic
|
$
|
(0.90
|
)
|
|
$
|
(0.66
|
)
|
|
$
|
(0.71
|
)
|
Diluted
|
$
|
(0.90
|
)
|
|
$
|
(0.66
|
)
|
|
$
|
(0.71
|
)
|
|
|
|
|
|
|
Weighted Average Number of Shares of Common Stock Outstanding
|
|
|
|
|
|
Basic
|
67,039,556
|
|
|
66,993,543
|
|
|
66,903,457
|
|
Diluted
|
67,039,556
|
|
|
66,993,543
|
|
|
66,903,457
|
|
See notes to Consolidated Financial Statements.
DRIVE SHACK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 and 2017
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Net loss
|
$
|
(54,854
|
)
|
|
$
|
(38,683
|
)
|
|
$
|
(42,201
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
Net unrealized (loss) gain on available-for-sale securities
|
(168
|
)
|
|
508
|
|
|
2,547
|
|
Reclassification of net realized (gain) on securities into earnings
|
—
|
|
|
—
|
|
|
(2,345
|
)
|
Other comprehensive (loss) income
|
(168
|
)
|
|
508
|
|
|
202
|
|
Total comprehensive loss
|
$
|
(55,022
|
)
|
|
$
|
(38,175
|
)
|
|
$
|
(41,999
|
)
|
Comprehensive loss attributable to Drive Shack Inc. stockholders' equity
|
$
|
(55,022
|
)
|
|
$
|
(38,175
|
)
|
|
$
|
(41,999
|
)
|
See notes to Consolidated Financial Statements.
DRIVE SHACK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 and 2017
(dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drive Shack Inc. Stockholders
|
|
|
|
|
|
|
|
|
|
Accumulated
Other Comp.
Income
(Loss)
|
|
Total Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
Additional
Paid in
Capital
|
|
|
|
|
|
Preferred Stock
|
|
Common Stock
|
|
|
Accumulated
Deficit
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
|
|
Equity (deficit) - December 31, 2016
|
2,463,321
|
|
|
$
|
61,583
|
|
|
66,824,304
|
|
|
$
|
668
|
|
|
$
|
3,172,720
|
|
|
$
|
(3,018,072
|
)
|
|
$
|
1,168
|
|
|
$
|
218,067
|
|
Dividends declared
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,580
|
)
|
|
—
|
|
|
(5,580
|
)
|
Issuance of common stock
|
—
|
|
|
—
|
|
|
152,800
|
|
|
2
|
|
|
561
|
|
|
—
|
|
|
—
|
|
|
563
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(42,201
|
)
|
|
—
|
|
|
(42,201
|
)
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
202
|
|
|
202
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41,999
|
)
|
Equity (deficit) - December 31, 2017
|
2,463,321
|
|
|
$
|
61,583
|
|
|
66,977,104
|
|
|
$
|
670
|
|
|
$
|
3,173,281
|
|
|
$
|
(3,065,853
|
)
|
|
$
|
1,370
|
|
|
$
|
171,051
|
|
Dividends declared
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,580
|
)
|
|
—
|
|
|
(5,580
|
)
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,252
|
|
|
|
|
|
|
2,252
|
|
Adoption of ASC 606
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,809
|
|
|
—
|
|
|
4,809
|
|
Purchase of common stock (directors)
|
—
|
|
|
—
|
|
|
50,000
|
|
|
—
|
|
|
310
|
|
|
—
|
|
|
—
|
|
|
310
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(38,683
|
)
|
|
—
|
|
|
(38,683
|
)
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
508
|
|
|
508
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38,175
|
)
|
Equity (deficit) - December 31, 2018
|
2,463,321
|
|
|
$
|
61,583
|
|
|
67,027,104
|
|
|
$
|
670
|
|
|
$
|
3,175,843
|
|
|
$
|
(3,105,307
|
)
|
|
$
|
1,878
|
|
|
$
|
134,667
|
|
Dividends declared
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,580
|
)
|
|
—
|
|
|
(5,580
|
)
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,317
|
|
|
—
|
|
|
—
|
|
|
1,317
|
|
Purchase of common stock (directors)
|
—
|
|
|
—
|
|
|
6,000
|
|
|
1
|
|
|
23
|
|
|
—
|
|
|
—
|
|
|
24
|
|
Shares issued from restricted stock units
|
—
|
|
|
—
|
|
|
35,647
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Adoption of ASC 842
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9,831
|
)
|
|
—
|
|
|
(9,831
|
)
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(54,854
|
)
|
|
—
|
|
|
(54,854
|
)
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(168
|
)
|
|
(168
|
)
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,022
|
)
|
Equity (deficit) - December 31, 2019
|
2,463,321
|
|
|
$
|
61,583
|
|
|
67,068,751
|
|
|
$
|
671
|
|
|
$
|
3,177,183
|
|
|
$
|
(3,175,572
|
)
|
|
$
|
1,710
|
|
|
$
|
65,575
|
|
See notes to Consolidated Financial Statements.
DRIVE SHACK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 and 2017
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Cash Flows From Operating Activities
|
|
|
|
|
|
Net loss
|
$
|
(54,854
|
)
|
|
$
|
(38,683
|
)
|
|
$
|
(42,201
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
22,396
|
|
|
19,704
|
|
|
24,304
|
|
Amortization of discount and premium
|
(275
|
)
|
|
1,159
|
|
|
(3,457
|
)
|
Other amortization
|
7,225
|
|
|
10,965
|
|
|
10,564
|
|
Net interest income on investments accrued to principal balance
|
—
|
|
|
—
|
|
|
(8,458
|
)
|
Amortization of revenue on golf membership deposit liabilities
|
(1,422
|
)
|
|
(1,549
|
)
|
|
(1,264
|
)
|
Amortization of prepaid golf member dues
|
(14,569
|
)
|
|
(26,545
|
)
|
|
(28,919
|
)
|
Non-cash operating lease expense
|
7,043
|
|
|
—
|
|
|
—
|
|
Stock based compensation
|
1,317
|
|
|
2,304
|
|
|
563
|
|
Impairment and other losses
|
15,413
|
|
|
8,240
|
|
|
60
|
|
Equity in earnings from equity method investment
|
(1,381
|
)
|
|
(1,471
|
)
|
|
(1,536
|
)
|
Other (gains) losses, net
|
(19,303
|
)
|
|
(9,651
|
)
|
|
5,429
|
|
Realized and unrealized (gain) loss on investments
|
—
|
|
|
(131
|
)
|
|
1,128
|
|
Loss on extinguishment of debt, net
|
230
|
|
|
1,542
|
|
|
294
|
|
Change in:
|
|
|
|
|
|
Accounts receivable, net, other current assets and other assets - noncurrent
|
2,727
|
|
|
3,075
|
|
|
(2,159
|
)
|
Accounts payable and accrued expenses, deferred revenue, other current liabilities and other liabilities - noncurrent
|
7,335
|
|
|
23,839
|
|
|
33,277
|
|
Net cash used in operating activities
|
(28,118
|
)
|
|
(7,202
|
)
|
|
(12,375
|
)
|
Cash Flows From Investing Activities
|
|
|
|
|
|
Proceeds from sale of property and equipment
|
62,899
|
|
|
78,888
|
|
|
—
|
|
Deposits received on real estate held-for-sale
|
—
|
|
|
9,400
|
|
|
—
|
|
Acquisition and additions of property and equipment and intangibles
|
(74,868
|
)
|
|
(62,352
|
)
|
|
(34,292
|
)
|
Proceeds from sale of securities and loans
|
—
|
|
|
—
|
|
|
595,850
|
|
Principal repayments from investments
|
—
|
|
|
—
|
|
|
100,020
|
|
Net payments for settlement of TBAs
|
—
|
|
|
—
|
|
|
(4,669
|
)
|
Contributions to equity method investment
|
(24
|
)
|
|
(7
|
)
|
|
(343
|
)
|
Net cash (used in) provided by investing activities
|
(11,993
|
)
|
|
25,929
|
|
|
656,566
|
|
Continued on next page.
DRIVE SHACK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 and 2017
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Cash Flows From Financing Activities
|
|
|
|
|
|
Preferred stock dividends paid
|
(5,580
|
)
|
|
(5,580
|
)
|
|
(5,580
|
)
|
Repayments of debt obligations
|
(7,440
|
)
|
|
(107,790
|
)
|
|
(606,568
|
)
|
Golf membership deposits received
|
2,262
|
|
|
3,143
|
|
|
3,431
|
|
Borrowings under debt obligations
|
—
|
|
|
—
|
|
|
1,651
|
|
Margin deposits under repurchase agreements and derivatives
|
—
|
|
|
—
|
|
|
(89,692
|
)
|
Return of margin deposits under repurchase agreements and derivatives
|
—
|
|
|
—
|
|
|
87,785
|
|
Common stock dividends paid
|
—
|
|
|
—
|
|
|
(8,019
|
)
|
Other financing activities
|
14
|
|
|
631
|
|
|
(55
|
)
|
Net cash used in financing activities
|
(10,744
|
)
|
|
(109,596
|
)
|
|
(617,047
|
)
|
Net (Decrease) Increase in Cash and Cash Equivalents, Restricted Cash and Restricted Cash, noncurrent
|
(50,855
|
)
|
|
(90,869
|
)
|
|
27,144
|
|
Cash and Cash Equivalents, Restricted Cash and Restricted Cash, noncurrent, Beginning of Period
|
82,819
|
|
|
173,688
|
|
|
146,544
|
|
Cash and Cash Equivalents, Restricted Cash and Restricted Cash, noncurrent, End of Period
|
$
|
31,964
|
|
|
$
|
82,819
|
|
|
$
|
173,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information
|
|
|
|
|
|
Cash paid during the period for interest expense
|
$
|
3,854
|
|
|
$
|
10,607
|
|
|
$
|
12,414
|
|
Cash paid during the period for income taxes
|
$
|
124
|
|
|
$
|
225
|
|
|
$
|
1,700
|
|
Supplemental Schedule of Non-Cash Investing and Financing Activities
|
|
|
|
|
|
Preferred stock dividends declared but not paid
|
$
|
930
|
|
|
$
|
930
|
|
|
$
|
930
|
|
Additions to finance lease assets and liabilities
|
$
|
12,776
|
|
|
$
|
4,442
|
|
|
$
|
4,265
|
|
Increases (decreases) in accounts payable and accrued expenses related to the purchase of property and equipment
|
$
|
(7,508
|
)
|
|
$
|
3,174
|
|
|
$
|
8,557
|
|
Property and equipment sold but not settled
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
800
|
|
See notes to Consolidated Financial Statements.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 and 2017
(dollars in tables in thousands, except per share data)
1. ORGANIZATION
Drive Shack Inc., which is referred to in this Annual Report on Form 10-K, together as Drive Shack Inc. or the Company, is an owner and operator of golf-related leisure and “eatertainment” venues focused on bringing people together through competitive socializing. The Company, a Maryland corporation, was formed in 2002, and its common stock is traded on the NYSE under the symbol “DS.”
The Company conducts its business through the following segments: (i) Entertainment Golf venues, (ii) Traditional Golf properties and (iii) corporate. For a further discussion of the reportable segments, see Note 4.
The Company opened its first Entertainment Golf venue in Orlando, Florida, in April 2018. During the fourth quarter of 2019, the Company briefly closed this venue to retrofit with Generation 2.0 enhancements, including new ball tracking technology, enhanced gaming and a redesigned outfield to provide a more engaging guest experience.
During the second half of 2019, the Company opened three Generation 2.0 core Entertainment Golf venues in Raleigh, North Carolina; Richmond, Virginia and West Palm Beach, Florida.
The Company's Traditional Golf business is one of the largest operators of golf properties in the United States. As of December 31, 2019, the Company owned, leased or managed 59 properties across 9 states.
The corporate segment consists primarily of securities and other investments and executive management.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Basis of Accounting — The accompanying Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles or GAAP. The Consolidated Financial Statements include the accounts of the Company and its consolidated subsidiaries. All significant intercompany transactions and balances have been eliminated. The Company consolidates those entities in which it has an investment of 50% or more and has control over significant operating, financial and investing decisions of the entity.
For entities over which the Company exercises significant influence, but which do not meet the requirements for consolidation, the Company uses the equity method of accounting whereby it records its share of the underlying income of such entities.
Prior Period Reclassifications — Certain prior period amounts have been reclassified to conform to the current period's presentation. Effective January 1, 2018, the Company internalized management (as discussed in Note 12) and records corporate overhead, including corporate payroll and related expenses, in "General and administrative expense" on the Consolidated Statements of Operations. Prior to January 1, 2018, the Company reported corporate overhead, including corporate payroll and related expenses, related to the Traditional Golf business in "Operating expenses" on the Consolidated Statements of Operations. The Company reclassified $14.8 million from "Operating expenses" to "General and administrative expense" for the year ended December 31, 2017.
The Company adopted ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments effective January 1, 2018, which requires retrospective adjustment to all periods. For the year ended December 31, 2017, the adjustment resulted in an increase of $0.8 million in “Other financing activities”, and a decrease of $0.8 million in “Change in Accounts payable and accrued expenses, deferred revenue, other current liabilities and other liabilities - noncurrent.”
The Company adopted ASU 2016-18 Statement of Cash Flows (Topic 230), Restricted Cash effective January 1, 2018, which requires retrospective adjustment to all periods. There were no adjustments for the year ended December 31, 2017 related to the addition of the reconciliation of restricted cash.
Risks and Uncertainties — We plan to develop and construct our Entertainment Golf business through long term ground leases, land acquisition and redevelopment of existing golf courses and other similar customary real estate agreements. Developing new
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 and 2017
(dollars in tables in thousands, except per share data)
Entertainment Golf venues requires a significant amount of time and resources and poses a number of risks. Construction of new venues may result in cost overruns, delays or unanticipated expenses related to zoning or tax laws. We face competition for potential site locations. Desirable sites may be unavailable or expensive, and the markets in which new venues are located may deteriorate over time. Additionally, the market potential of venues cannot be precisely determined, and our venues may face competition in new markets from unexpected sources. Constructed venues may not perform up to our expectations. For additional information, see Part I, Item 1A. “Risk Factors - Risk Related to Our Business.”
Use of Estimates — The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Comprehensive Income — Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances, excluding those resulting from investments by and distributions to owners. For the Company's purposes, comprehensive income represents primarily net income, as presented in the Consolidated Statements of Operations, adjusted for unrealized gains or losses on securities available-for-sale. As of December 31, 2019 and 2018, accumulated other comprehensive income included net unrealized gain on securities of $1.7 and $1.9 million, respectively.
REVENUE RECOGNITION
Golf Operations
Entertainment Golf — Revenue from bay play, events, and other operating activities (consisting primarily of instruction and merchandise sales) is generally recognized at a point in time which is at the time of sale, when services are rendered and collectibility is probable.
Traditional Golf — Revenue from green fees, cart rentals, merchandise sales and other operating activities (consisting primarily of range income, banquets and club amenities) is generally recognized at a point in time which is at the time of sale, when services are rendered and collectibility is probable.
Revenue from membership dues for private club members and The Players Club members is recognized in the month earned. Membership dues received in advance are included in deferred revenue and recognized as revenue ratably over the appropriate period, which is generally twelve months or less for private club members and the following month for The Players Club members. The membership dues are generally structured to cover the club operating costs and membership services.
Private country club members generally pay an advance initiation fee deposit upon their acceptance as a member to the respective country club. Initiation fee deposits are refundable 30 years after the date of acceptance as a member. The difference between the initiation fee deposit paid by the member and the present value of the refund obligation is deferred and recognized into revenue in the Consolidated Statements of Operations on a straight-line basis over the expected life of an active membership, which is estimated to be seven years. The determination of the estimated average expected life of an active membership requires significant judgment and is based on company-specific historical membership addition and attrition data. The present value of the refund obligation is recorded as a membership deposit liability in the Consolidated Balance Sheets and accretes over a 30-year nonrefundable term using the effective interest method. This accretion is recorded as interest expense in the Consolidated Statements of Operations.
Revenue from the reimbursement of certain operating costs incurred at the Company’s managed Traditional Golf properties is recognized at the time the associated operating costs are incurred as collectibility is probable per the terms of the management contracts and the repayment histories of the property owners.
Sales of Food and Beverages — Revenue from food and beverage sales are recorded at the time of sale, net of discounts.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 and 2017
(dollars in tables in thousands, except per share data)
Realized and Unrealized (Gain) Loss on Investments and Other Income (Loss), Net — These items are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
(Gain) on settlement of real estate securities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(2,345
|
)
|
Loss on settlement of real estate securities
|
—
|
|
|
—
|
|
|
2,803
|
|
Realized (gain) loss on settlement of non-hedge derivatives, net
|
—
|
|
|
(227
|
)
|
|
4,669
|
|
(Gain) loss on settlement of loans held-for-sale
|
—
|
|
|
—
|
|
|
(12
|
)
|
Unrealized loss on securities, intent-to-sell
|
—
|
|
|
—
|
|
|
558
|
|
Unrealized loss (gain) on non-hedge derivative instruments
|
—
|
|
|
96
|
|
|
570
|
|
Realized and unrealized loss (gain) on investments
|
$
|
—
|
|
|
$
|
(131
|
)
|
|
$
|
6,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on sale of long-lived assets and intangibles
|
$
|
19,338
|
|
|
$
|
8,704
|
|
|
$
|
(295
|
)
|
(Loss) on lease modifications and terminations
|
—
|
|
|
(939
|
)
|
|
(161
|
)
|
(Loss) on extinguishment of debt, net
|
(230
|
)
|
|
(1,542
|
)
|
|
(294
|
)
|
Collateral management fee income, net
|
440
|
|
|
575
|
|
|
387
|
|
Equity in earnings of equity method investments
|
1,381
|
|
|
1,471
|
|
|
1,536
|
|
Other (loss) (A)
|
(53
|
)
|
|
(5,389
|
)
|
|
(1,079
|
)
|
Other income, net
|
$
|
20,876
|
|
|
$
|
2,880
|
|
|
$
|
94
|
|
|
|
(A)
|
During the year ended December 31, 2018, the Company recorded a net loss of approximately $4.9 million related to the settlement of a legal dispute and a related discharge of liabilities assumed by the counterparty to the settlement. See Note 13 for additional information.
|
Reclassification From Accumulated Other Comprehensive Income Into Net Income — During the year ended December 31, 2017, a $2.3 million gain on settlement of real estate securities was reclassified out of accumulated other comprehensive income or AOCI into net income, and recorded in "Realized and unrealized (gain) loss on investments" in the Consolidated Statements of Operations. There were no reclassifications from AOCI into net income during the years ended December 31, 2019 and 2018.
EXPENSE RECOGNITION
Operating Expenses — Operating expenses consist primarily of payroll, utilities, repairs and maintenance, supplies, marketing, technology support and operating lease rent expense. A majority of the properties and related facilities are leased under long-term operating leases. See Note 6 for additional information.
General and Administrative Expense — General and administrative expense consists of costs associated with corporate and administrative functions that support development and operations.
Pre-Opening Costs — Pre-opening costs are expensed as incurred and consist primarily of employee payroll, marketing expenses, operating lease costs, travel and related expenses, training costs, food, beverage and other restaurant operating expenses incurred prior to opening an Entertainment Golf venue.
Deferred Costs — Deferred costs consist primarily of costs incurred in obtaining financing which are amortized into interest expense over the term of such financing using either the straight-line basis or the interest method. Deferred financing costs are presented as a direct deduction from the carrying amount of the related debt liability.
Interest Expense, Net — The Company financed Traditional Golf and Corporate using both fixed and floating rate debt, including mortgage loans and other financing vehicles. Certain of this debt has been issued at a discount. Discounts are accreted into interest expense on the effective yield or interest method, based upon a comparison of actual and expected cash flows, through the expected maturity date of the financing. See Note 10 for additional information.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 and 2017
(dollars in tables in thousands, except per share data)
Stock-Based Compensation Expense — The Company maintains an equity incentive plan under which non-qualified stock options, incentive stock options, and restricted stock units or RSUs are granted to employees and non-employee directors. Stock options and RSUs are expensed based on the fair value on the date of grant and amortized on a straight-line basis over the requisite service period. The fair value of RSUs is determined using the stock price on the date of grant. The fair value of stock options is estimated on the grant date using the Black-Scholes option valuation model. Unvested stock options and RSUs are forfeited by non-employee directors upon their departure from the board of directors and forfeited by employees upon their termination. All stock-based compensation expense is recorded as general and administrative expense in the Consolidated Statement of Operations. See Note 11 for additional information.
BALANCE SHEET MEASUREMENT
Property and Equipment, Net — Real estate acquired, related improvements and equipment are recorded at cost less accumulated depreciation. Costs that both materially add value to an asset and extend the useful life of an asset by more than a year are capitalized which may include significant renovations, remodels and major repairs. Costs that do not meet this criteria, such as minor repairs and routine maintenance, are expensed as incurred.
Depreciation is calculated using the straight-line method based on the lesser of the following estimated useful lives or the lease term:
|
|
|
Buildings and improvements
|
10-40 years
|
Finance leases - equipment
|
2-6 years
|
Furniture, fixtures, and equipment
|
2-7 years
|
The Company leases certain golf carts and other equipment that are classified as finance leases. The value of finance leases is recorded as an asset on the balance sheet, along with a liability related to the present value of associated payments. Depreciation of finance lease assets is calculated using the straight-line method over the shorter of the estimated useful lives or the expected lease terms. The cost of equipment under finance leases is recorded in "Property and equipment, net of accumulated depreciation" on the Consolidated Balance Sheets. Payments under the leases are treated as reductions of the obligations under finance leases, with a portion being recorded as interest expense under the effective interest method.
Real Estate, Held-for-Sale — Long-lived assets to be disposed of by sale, which meet certain criteria, are reclassified to real estate held-for-sale and measured at the lower of their carrying amount or fair value less costs of sale. The Company suspends depreciation and amortization for assets held-for-sale. Subsequent changes to the estimated fair value less costs to sell could impact the measurement of assets held-for-sale. Decreases below carrying value are recognized as an impairment loss and recorded in "Impairment and other losses" on the Consolidated Statements of Operations. To the extent the fair value increases, any previously reported impairment is reversed to the extent of any impairment taken. Real estate held-for-sale is recorded in “Real estate assets, held-for-sale, net” and “Real estate liabilities, held-for-sale” on the Consolidated Balance Sheets.
Real Estate Securities — The Company invested in securities, including real estate related asset backed securities which are classified as available-for-sale. Securities available-for-sale are carried at market value with the net unrealized gains or losses reported as a separate component of accumulated other comprehensive income, to the extent impairment losses are considered temporary. At disposition, the net realized gain or loss is determined on the basis of the cost of the specific investments and is included in earnings. Unrealized losses on securities are charged to earnings if there is an intent to sell or if they reflect a decline in value that is other-than-temporary. Income on these securities is recognized using a level yield methodology based upon a number of cash flow assumptions that are subject to uncertainties and contingencies.
Impairment of Securities — The Company continually evaluates securities for impairment. Securities are considered to be other-than-temporarily impaired, for financial reporting purposes, whenever there has been a probable adverse change in the timing or amounts of expected cash flows. The Company must record a write-down if it has the intent to sell a given security in an unrealized loss position, or if it is more likely than not that it will be required to sell such a security. Upon determination of impairment, the Company records a direct write-down for securities based on the estimated fair value of the security or underlying collateral using a discounted cash flow analysis or based on an observable market value. Actual losses may differ from the Company’s estimates.
Leasing Arrangements — The Company evaluates at lease inception whether an arrangement is or contains a lease by providing the Company with the right to control an asset. Operating leases are accounted for on the balance sheet with the Right of Use (“ROU”) assets and lease liabilities recognized in "Operating lease right-of-use assets," "Other current liabilities" and "Operating
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 and 2017
(dollars in tables in thousands, except per share data)
lease liabilities - noncurrent" in the Consolidated Balance Sheets. Finance lease ROU assets, current lease liabilities and noncurrent lease liabilities are recognized in "Property and equipment, net of accumulated depreciation," and "Obligations under finance leases" and "Credit facilities and obligations under finance leases - noncurrent" in the Consolidated Balance Sheets, respectively.
All lease liabilities are measured at the present value of the associated payments, discounted using the Company’s incremental borrowing rate determined using a portfolio approach based on the rate of interest that the Company would pay to borrow an amount equal to the lease payments for a similar term and in a similar economic environment on a collateralized basis. ROU assets, for both operating and finance leases, are initially measured based on the lease liability, adjusted for initial direct costs, prepaid rent, and lease incentives received and are subsequently amortized into lease cost on a straight-line basis. Depreciation of the finance lease ROU assets are subsequently calculated using the straight-line method over the shorter of the estimated useful lives or the expected lease terms and recorded in "Depreciation and amortization" on the Consolidated Statements of Operations.
In addition to the fixed minimum payments required under the lease arrangements, certain leases require variable lease payments, which are payment of the excess of various percentages of gross revenue or net operating income over the minimum rental payments as well as payment of taxes assessed against the leased property. The leases generally also require the payment for the cost of insurance and maintenance. Variable lease payments are recognized when the associated activity occurs and contingency is resolved.
The Company has elected to combine lease and non-lease components for all lease contracts.
Intangibles, Net — Intangible assets and liabilities consist primarily of management contracts, membership base and internally-developed software. The management contract intangible represents the Company’s golf course management contracts for both leased and managed properties. The management contract intangible for leased and managed properties was valued using the discounted cash flow method under the income approach and is amortized over the term of the underlying lease or management agreements, respectively. The membership base intangible represents the Company’s relationship with its private country club members. The membership base intangible was valued using the multi-period excess earnings method under the income approach, and is amortized over the expected life of an active membership. Internally-developed software represents proprietary software developed for the Company’s exclusive use. Internally-developed software is amortized over the expected useful life of the software.
Amortization of intangible assets is included within depreciation and amortization in the Consolidated Statements of Operations. Amortization of all intangible assets is calculated using the straight-line method based on the following estimated useful lives:
|
|
|
Trade name
|
30 years
|
Management contracts
|
2 - 26 years
|
Internally-developed software
|
3 - 5 years
|
Membership base
|
7 years
|
Liquor licenses
|
Nonamortizable
|
Impairment of Long-lived Assets — The Company periodically reviews the carrying amounts of its long-lived assets, including real estate held-for-use and held-for-sale, as well as finite-lived intangible assets and right-of-use assets, to determine whether current events or circumstances indicate that such carrying amounts may not be recoverable. The assessment of recoverability is based on management’s estimates by comparing the sum of the estimated undiscounted cash flows generated by the underlying asset, or other appropriate grouping of assets, to its carrying value to determine whether an impairment existed at its lowest level of identifiable cash flows. If the carrying amount is greater than the expected undiscounted cash flows, the assets are considered impaired and an impairment is recognized to the extent the carrying value of such asset exceeds its fair value. The Company generally measures fair value by considering sale prices for similar assets or by discounting estimated future cash flows using an appropriate discount rate.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 and 2017
(dollars in tables in thousands, except per share data)
Membership Deposit Liabilities — Private country club members in our Traditional Golf business generally pay an advance initiation fee deposit upon their acceptance as a member to the respective country club. Initiation fee deposits are refundable 30 years after the date of acceptance as a member. The difference between the initiation fee deposit paid by the member and the present value of the refund obligation is deferred and recognized into Golf operations revenue in the Consolidated Statements of Operations on a straight-line basis over the expected life of an active membership, which is estimated to be seven years. The present value of the refund obligation is recorded as a membership deposit liability in the Consolidated Balance Sheets and accretes over a 30-year nonrefundable term using the effective interest method. This accretion is recorded as interest expense in the Consolidated Statements of Operations.
Other Investment — The Company owns an approximately 22% economic interest in a limited liability company which owns preferred equity in a commercial entertainment and retail real estate project. The Company accounts for this investment as an equity method investment. As of December 31, 2019 and 2018, the carrying value of this investment was $24.0 million and $22.6 million, respectively. The Company evaluates its equity method investment for other than temporary impairment whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable. The evaluation of recoverability is based on management’s assessment of the financial condition and near term prospects of the real estate project, the length of time and the extent to which the market value of the investment has been less than cost, availability and cost of financing, demand for space, competition for tenants, guest visits, changes in market rental rates, and net operating results. As these factors are difficult to predict and are subject to future events that may alter management’s assumptions, the values estimated by management in its recoverability analyses may not be realized, and actual losses or impairment may be realized in the future. As the fair value inputs utilized are unobservable, the Company determined that the significant inputs used to value this real estate investment falls within Level 3 for fair value reporting.
Cash and Cash Equivalents and Restricted Cash — The Company considers all highly liquid short-term investments with maturities of 90 days or less when purchased to be cash equivalents. Substantially all amounts on deposit with major financial institutions exceed insured limits. The Company has not experienced any losses in the accounts and believe that the Company is not exposed to significant credit risk because the accounts are at major financial institutions. Restricted cash consisted of:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
CDO trustee accounts
|
$
|
114
|
|
|
$
|
127
|
|
Restricted cash for construction-in-progress
|
1,536
|
|
|
2,008
|
|
Restricted cash - Traditional Golf
|
1,656
|
|
|
1,266
|
|
Restricted cash - Entertainment Golf
|
235
|
|
|
183
|
|
Restricted cash, current and noncurrent
|
$
|
3,541
|
|
|
$
|
3,584
|
|
Accounts Receivable, Net — Accounts receivable are stated at amounts due from customers, net of an allowance for doubtful accounts of $1.1 million and $1.0 million as of December 31, 2019 and 2018, respectively. The allowance for doubtful accounts is based upon several factors including the length of time the receivables are past due, historical payment trends and current economic factors. Collateral is generally not required. The allowance for doubtful accounts increased by $0.1 million and by $0.2 million for the years ended December 31, 2019 and 2018, respectively.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 and 2017
(dollars in tables in thousands, except per share data)
Other Current Assets
The following table summarizes the Company's other current assets:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Managed property receivables
|
5,426
|
|
|
4,225
|
|
Prepaid expenses
|
3,608
|
|
|
2,651
|
|
Deposits
|
1,374
|
|
|
2,494
|
|
Inventory
|
2,762
|
|
|
2,855
|
|
Miscellaneous current assets, net
|
4,351
|
|
|
8,280
|
|
Other current assets
|
$
|
17,521
|
|
|
$
|
20,505
|
|
Other Assets
The following table summarizes the Company's other assets:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Prepaid expenses
|
$
|
317
|
|
|
$
|
277
|
|
Deposits
|
2,123
|
|
|
2,140
|
|
Miscellaneous assets, net
|
2,283
|
|
|
6,267
|
|
Other assets
|
$
|
4,723
|
|
|
$
|
8,684
|
|
Managed Property Receivables – Managed property receivables consists of amounts due from Traditional Golf managed properties.
Prepaid Expenses – Prepaid expenses consists primarily of prepaid insurance and prepaid rent and are expensed over the usage period of the goods or services.
Deposits – Deposits consist primarily of property lease security deposits.
Inventory – Inventory is valued at the lower of cost or market. Cost is determined on the first-in, first-out (“FIFO”) method. Inventories consist primarily of food, beverages and merchandise for sale.
Accounts Payable and Accrued Expenses — Accounts payable reflect expenses related to goods and services received that have not yet been paid and accrued expenses reflect expenses related to goods received and services performed for which invoices have not yet been received.
Deferred Revenue — Payments received in advance of the performance of services are recorded as deferred revenue until the services are performed.
Other Current Liabilities
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 and 2017
(dollars in tables in thousands, except per share data)
The following table summarizes the Company's other current liabilities:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Security deposits payable
|
$
|
—
|
|
|
$
|
14,188
|
|
Operating lease liabilities
|
16,922
|
|
|
—
|
|
Accrued rent
|
2,769
|
|
|
2,885
|
|
Dividends payable
|
930
|
|
|
930
|
|
Miscellaneous current liabilities
|
3,343
|
|
|
4,282
|
|
Other current liabilities
|
$
|
23,964
|
|
|
$
|
22,285
|
|
Other Liabilities
The following table summarizes the Company's other liabilities:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Service obligation intangible
|
$
|
1,776
|
|
|
$
|
2,759
|
|
Accrued rent
|
—
|
|
|
1,617
|
|
Miscellaneous liabilities
|
1,502
|
|
|
856
|
|
Other liabilities
|
$
|
3,278
|
|
|
$
|
5,232
|
|
Security Deposits Payable – Security deposits payable relate to deposits received for events and other activities at Traditional Golf properties.
Operating Lease Liabilities – Operating lease liabilities relate to ground leases and/or related facilities and office leases. See Note 6 for additional information
Service Obligation Intangible – Service obligation intangible relates to the Company's obligation to operate leased golf properties that were expected to generate losses as part of the Traditional Golf acquisition.
Accrued Rent – Accrued rent primarily relates to amounts accrued or owed for variable lease costs.
Dividends Payable – Represents dividends declared but not paid.
Stock Options — The fair value of the options issued as compensation to FIG LLC (the former "Manager") for its successful efforts in raising capital for the Company was recorded as an increase in equity with an offsetting reduction of capital proceeds received. Stock options granted to the Company’s employees and non-employee directors were recorded as an increase in equity. See Note 11 for additional information.
Restricted Stock Units or RSUs — The fair value of the RSUs issued to the Company's employees and independent directors as part of annual compensation were recorded as an increase in equity. See Note 11 for additional information.
Preferred Stock — The Company’s accounting policy for its preferred stock is described in Note 11.
Income Taxes – The Company accounts for income taxes pursuant to the asset and liability method which requires the recognition of deferred income tax assets and liabilities related to the expected future tax consequences arising from temporary differences between the carrying amounts and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates applicable to the periods in which the temporary differences are expected to reverse. A valuation allowance is recognized if the Company determines it is more likely than not that all or a portion of a deferred tax asset will not be recognized.
The Company recognizes tax benefits for uncertain tax positions only if it is more likely than not that the position is sustainable based on its technical merits. Interest and penalties on uncertain tax positions are included as a component of the provision for income taxes in the Consolidated Statements of Operations. See Note 14 for additional information.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 and 2017
(dollars in tables in thousands, except per share data)
Amortization of Discount and Premium and Other Amortization — As reflected in the Consolidated Statements of Cash Flows, these items are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Accretion of net discount on securities, loans and other investments
|
$
|
(267
|
)
|
|
$
|
(151
|
)
|
|
$
|
(4,698
|
)
|
Amortization of net discount on debt obligations and deferred financing costs
|
(8
|
)
|
|
1,310
|
|
|
1,241
|
|
Amortization of discount and premium
|
$
|
(275
|
)
|
|
$
|
1,159
|
|
|
$
|
(3,457
|
)
|
|
|
|
|
|
|
Amortization of leasehold intangibles
|
$
|
—
|
|
|
$
|
4,093
|
|
|
$
|
4,111
|
|
Accretion of membership deposit liability
|
7,225
|
|
|
6,872
|
|
|
6,453
|
|
Other amortization
|
$
|
7,225
|
|
|
$
|
10,965
|
|
|
$
|
10,564
|
|
Recent Accounting Pronouncements — In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02 Leases (Topic 842). The standard requires lessees to recognize most leases on the balance sheet and addresses certain aspects of lessor accounting. On January 1, 2019, the Company adopted ASU 2016-02 using a modified retrospective approach. The Company utilized the effective date transition method and accordingly was not required to adjust its comparative period financial information for effects of ASU 2016-02. The Company elected to adopt practical expedients which permits it to not reassess its prior conclusions about lease identification, lease classification and initial direct costs under the new standard. The Company elected to combine lease and non-lease components for all lease contracts and also elected not to recognize ROU assets and lease liabilities for leases with terms of 12 months or less. The Company also elected to adopt the practical expedient for land easements which permits it not to evaluate existing and expired land easements under the new standard. The adoption of ASU 2016-02 had a material impact on the Company’s Consolidated Balance Sheets, resulting in the recognition of operating lease right-of-use assets and operating lease liabilities of $225.6 million and $205.9 million, respectively, with the difference primarily due to reclassifications of leasehold intangibles and an adjustment to accumulated deficit. There was no material impact on the Consolidated Statements of Operations.
In June 2016, the FASB issued ASU 2016-13 Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The standard changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount under the other-than-temporary impairment model. In November 2018, the FASB issued ASU 2018-19 Codification Improvements to Topic 326, Financial Instruments - Credit Losses, which clarifies that operating lease receivables accounted for under ASC 842 are not in the scope of this guidance. In April 2019, the FASB issued ASU 2019-04 Codification Improvements to Topic 326, Financial Instruments - Credit Losses, which addresses certain fair value disclosure requirements, the measurement basis under the measurement alternative and which equity securities have to be remeasured at historical exchange rates. In May 2019, the FASB issued Financial Instruments - Credit Losses (Topic 326), Targeted Transition Relief, which allows entities to elect to measure assets in the scope of ASC 326-20, using the fair value option when ASU 2016-13 is adopted. In November 2019, the FASB issued ASU 2019-11 Codification Improvements to Topic 326, Financial Instruments - Credit Losses which makes several narrow-scope amendments to the new credit losses standard, including an amendment requiring entities to include certain expected recoveries of the amortized cost basis previously written off. The effective date of the standards will be for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 and early adoption is permitted for annual periods beginning after December 15, 2018. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company has identified the financial assets in the scope of the new standard and is developing methods to estimate current expected credit losses associated with these financial assets, and determining changes needed to control activities. The Company does not expect a material impact on its Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-15 Intangibles-Goodwill and Other-Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The standard requires a customer in a cloud computing arrangement (i.e., a hosting arrangement) that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 and 2017
(dollars in tables in thousands, except per share data)
incurred. That guidance requires certain costs incurred during the application development stage to be capitalized and other costs incurred during the preliminary project and post-implementation stages to be expensed as they are incurred. Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. The effective date of the standard will be for annual periods beginning after December 15, 2019. The Company early adopted the standard on October 1, 2019 applying the guidance prospectively to all implementation costs incurred after that date. The adoption did not have a material impact on the Consolidated Financial Statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The standard removes certain exceptions for investments, intraperiod allocations and interim tax calculations and adds guidance to reduce complexity in accounting for income taxes. The effective date of the standard will be for annual periods beginning after December 15, 2020, with early adoption permitted. The various amendments in the standard are applied on a retrospective basis, modified retrospective basis and prospective basis, depending on the amendment. The Company is currently evaluating the new guidance to determine the impact it may have on its Consolidated Financial Statements.
3. REVENUES
The majority of the Company’s revenue is recognized at a point in time which is at the time of sale to customers at the Company’s Entertainment Golf venues and Traditional Golf properties, including green fees, cart rentals, bay play, events and sales of food, beverages and merchandise. Revenue from membership dues is recognized in the month earned. Membership dues received in advance are included in deferred revenue and recognized as revenue ratably over the appropriate period, which is generally twelve months or less for private club members and the following month for The Players Club members.
The Company’s revenue is all generated within the Entertainment and Traditional Golf segments. The following table disaggregates revenue by category: Entertainment Golf venues, public and private golf properties (owned and leased) and managed golf properties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
|
Ent. golf venues
|
|
Public golf properties
|
|
Private golf properties
|
|
Managed golf properties (A)
|
|
Total
|
|
Ent. golf venues
|
|
Public golf properties
|
|
Private golf properties
|
|
Managed golf properties (A)
|
|
Total
|
Golf operations
|
|
7,806
|
|
|
96,777
|
|
|
53,728
|
|
|
58,186
|
|
|
216,497
|
|
|
2,191
|
|
|
116,009
|
|
|
101,669
|
|
|
24,777
|
|
|
244,646
|
|
Sales of food and beverages
|
|
11,974
|
|
|
32,347
|
|
|
11,246
|
|
|
—
|
|
|
55,567
|
|
|
2,713
|
|
|
39,280
|
|
|
27,730
|
|
|
—
|
|
|
69,723
|
|
Total revenues
|
|
$
|
19,780
|
|
|
$
|
129,124
|
|
|
$
|
64,974
|
|
|
$
|
58,186
|
|
|
$
|
272,064
|
|
|
$
|
4,904
|
|
|
$
|
155,289
|
|
|
$
|
129,399
|
|
|
$
|
24,777
|
|
|
$
|
314,369
|
|
|
|
(A)
|
Includes $52.4 million and $22.1 million for the years ended December 31, 2019 and 2018, respectively, due to management contract reimbursements reported under ASC 606.
|
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 and 2017
(dollars in tables in thousands, except per share data)
4. SEGMENT REPORTING
The Company currently has three reportable segments: (i) Entertainment Golf venues, (ii) Traditional Golf properties, and (iii) corporate. The chief operating decision maker (“CODM”) for each segment is our Chief Executive Officer and President, who reviews discrete financial information for each reportable segment to manage the Company, including resource allocation and performance assessment.
The Company opened its first Entertainment Golf venue in Orlando, Florida, in April 2018. During the second half of 2019, the Company opened three Generation 2.0 core Entertainment Golf venues in Raleigh, North Carolina; Richmond, Virginia and West Palm Beach, Florida.
Additionally, the Company’s Traditional Golf business is one of the largest operators of golf properties in the United States. As of December 31, 2019, the Company owned, leased or managed 59 properties across 9 states.
The corporate segment consists primarily of investments in loans and securities, interest income on short-term investments, general and administrative expenses as a public company, interest expense on the junior subordinated notes payable (Note 8) and income tax expense (Note 14).
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 and 2017
(dollars in tables in thousands, except per share data)
Summary financial data on the Company’s segments is given below, together with reconciliation to the same data for the Company as a whole:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment Golf
|
|
Traditional Golf
|
|
Corporate
|
|
Total
|
Year Ended December 31, 2019
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Golf operations
|
$
|
7,806
|
|
|
$
|
208,691
|
|
|
$
|
—
|
|
|
$
|
216,497
|
|
Sales of food and beverages
|
11,974
|
|
|
43,593
|
|
|
—
|
|
|
55,567
|
|
Total revenues
|
19,780
|
|
|
252,284
|
|
|
—
|
|
|
272,064
|
|
Operating costs
|
|
|
|
|
|
|
|
Operating expenses (A)
|
16,403
|
|
|
212,903
|
|
|
—
|
|
|
229,306
|
|
Cost of sales - food and beverages
|
2,984
|
|
|
12,233
|
|
|
—
|
|
|
15,217
|
|
General and administrative expense (B)
|
14,081
|
|
|
16,812
|
|
|
12,008
|
|
|
42,901
|
|
General and administrative expense - acquisition and transaction expenses (C)
|
3,490
|
|
|
798
|
|
|
787
|
|
|
5,075
|
|
Depreciation and amortization
|
5,935
|
|
|
16,266
|
|
|
195
|
|
|
22,396
|
|
Pre-opening costs (D)
|
9,040
|
|
|
—
|
|
|
—
|
|
|
9,040
|
|
Impairment and other losses
|
10,196
|
|
|
5,217
|
|
|
—
|
|
|
15,413
|
|
Realized and unrealized loss on investments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total operating costs
|
62,129
|
|
|
264,229
|
|
|
12,990
|
|
|
339,348
|
|
Operating loss
|
(42,349
|
)
|
|
(11,945
|
)
|
|
(12,990
|
)
|
|
(67,284
|
)
|
Other income (expenses)
|
|
|
|
|
|
|
|
Interest and investment income
|
321
|
|
|
105
|
|
|
529
|
|
|
955
|
|
Interest expense (E)
|
(355
|
)
|
|
(8,238
|
)
|
|
(2,415
|
)
|
|
(11,008
|
)
|
Capitalized interest (E)
|
—
|
|
|
586
|
|
|
1,662
|
|
|
2,248
|
|
Other income (loss), net
|
—
|
|
|
19,069
|
|
|
1,807
|
|
|
20,876
|
|
Total other income (expenses)
|
(34
|
)
|
|
11,522
|
|
|
1,583
|
|
|
13,071
|
|
Income tax expense
|
62
|
|
|
8
|
|
|
571
|
|
|
641
|
|
Net loss
|
(42,445
|
)
|
|
(431
|
)
|
|
(11,978
|
)
|
|
(54,854
|
)
|
Preferred dividends
|
—
|
|
|
—
|
|
|
(5,580
|
)
|
|
(5,580
|
)
|
Loss applicable to common stockholders
|
$
|
(42,445
|
)
|
|
$
|
(431
|
)
|
|
$
|
(17,558
|
)
|
|
$
|
(60,434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment Golf
|
|
Traditional Golf
|
|
Corporate (F)
|
|
Total
|
December 31, 2019
|
|
|
|
|
|
|
|
Total assets
|
163,583
|
|
|
308,456
|
|
|
43,952
|
|
|
515,991
|
|
Total liabilities
|
36,375
|
|
|
350,968
|
|
|
63,073
|
|
|
450,416
|
|
Preferred stock
|
—
|
|
|
—
|
|
|
61,583
|
|
|
61,583
|
|
Equity (loss) attributable to common stockholders
|
$
|
127,208
|
|
|
$
|
(42,512
|
)
|
|
$
|
(80,704
|
)
|
|
$
|
3,992
|
|
|
|
|
|
|
|
|
|
Additions to property and equipment (including finance leases) during the year ended December 31, 2019
|
$
|
62,543
|
|
|
$
|
14,966
|
|
|
$
|
1,764
|
|
|
$
|
79,273
|
|
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 and 2017
(dollars in tables in thousands, except per share data)
Summary segment financial data (continued).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment Golf
|
|
Traditional Golf
|
|
Corporate
|
|
Total
|
Year Ended December 31, 2018
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
Golf operations
|
$
|
2,191
|
|
|
$
|
242,455
|
|
|
$
|
—
|
|
|
$
|
244,646
|
|
Sales of food and beverages
|
2,713
|
|
|
67,010
|
|
|
—
|
|
|
69,723
|
|
Total revenues
|
4,904
|
|
|
309,465
|
|
|
—
|
|
|
314,369
|
|
Operating costs
|
|
|
|
|
|
|
|
Operating expenses (A)
|
5,398
|
|
|
246,396
|
|
|
—
|
|
|
251,794
|
|
Cost of sales - food and beverages
|
640
|
|
|
19,513
|
|
|
—
|
|
|
20,153
|
|
General and administrative expense (B)
|
6,382
|
|
|
16,702
|
|
|
11,271
|
|
|
34,355
|
|
General and administrative expense - acquisition and transaction expenses (C)
|
2,679
|
|
|
1,024
|
|
|
502
|
|
|
4,205
|
|
Depreciation and amortization
|
1,886
|
|
|
17,814
|
|
|
4
|
|
|
19,704
|
|
Pre-opening costs (D)
|
2,483
|
|
|
—
|
|
|
—
|
|
|
2,483
|
|
Impairment and other losses
|
—
|
|
|
8,093
|
|
|
147
|
|
|
8,240
|
|
Realized and unrealized loss on investments
|
—
|
|
|
(131
|
)
|
|
—
|
|
|
(131
|
)
|
Total operating costs
|
19,468
|
|
|
309,411
|
|
|
11,924
|
|
|
340,803
|
|
Operating (loss) income
|
(14,564
|
)
|
|
54
|
|
|
(11,924
|
)
|
|
(26,434
|
)
|
Other income (expenses)
|
|
|
|
|
|
|
|
Interest and investment income
|
281
|
|
|
194
|
|
|
1,319
|
|
|
1,794
|
|
Interest expense (E)
|
—
|
|
|
(16,046
|
)
|
|
(2,274
|
)
|
|
(18,320
|
)
|
Capitalized interest (E)
|
—
|
|
|
1,121
|
|
|
560
|
|
|
1,681
|
|
Other income, net
|
—
|
|
|
846
|
|
|
2,034
|
|
|
2,880
|
|
Total other income (expenses)
|
281
|
|
|
(13,885
|
)
|
|
1,639
|
|
|
(11,965
|
)
|
Income tax expense
|
—
|
|
|
—
|
|
|
284
|
|
|
284
|
|
Net loss
|
(14,283
|
)
|
|
(13,831
|
)
|
|
(10,569
|
)
|
|
(38,683
|
)
|
Preferred dividends
|
—
|
|
|
—
|
|
|
(5,580
|
)
|
|
(5,580
|
)
|
Loss applicable to common stockholders
|
$
|
(14,283
|
)
|
|
$
|
(13,831
|
)
|
|
$
|
(16,149
|
)
|
|
$
|
(44,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment Golf
|
|
Traditional Golf
|
|
Corporate (F)
|
|
Total
|
December 31, 2018
|
|
|
|
|
|
|
|
Total assets
|
117,416
|
|
|
225,904
|
|
|
58,627
|
|
|
401,947
|
|
Total liabilities
|
13,561
|
|
|
196,836
|
|
|
56,883
|
|
|
267,280
|
|
Preferred stock
|
—
|
|
|
—
|
|
|
61,583
|
|
|
61,583
|
|
Equity attributable to common stockholders
|
$
|
103,855
|
|
|
$
|
29,068
|
|
|
$
|
(59,839
|
)
|
|
$
|
73,084
|
|
|
|
|
|
|
|
|
|
Additions to property and equipment (including finance leases) during the year ended December 31, 2018
|
$
|
55,924
|
|
|
$
|
14,042
|
|
|
$
|
—
|
|
|
$
|
69,966
|
|
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 and 2017
(dollars in tables in thousands, except per share data)
Summary segment financial data (continued).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment Golf
|
|
Traditional Golf
|
|
Corporate
|
|
Total
|
Year Ended December 31, 2017
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
Golf operations
|
$
|
—
|
|
|
$
|
221,737
|
|
|
$
|
—
|
|
|
$
|
221,737
|
|
Sales of food and beverages
|
—
|
|
|
70,857
|
|
|
—
|
|
|
70,857
|
|
Total revenues
|
—
|
|
|
292,594
|
|
|
—
|
|
|
292,594
|
|
Operating costs
|
|
|
|
|
|
|
|
Operating expenses (A)
|
—
|
|
|
232,796
|
|
|
—
|
|
|
232,796
|
|
Cost of sales - food and beverages
|
—
|
|
|
20,959
|
|
|
—
|
|
|
20,959
|
|
General and administrative expense (B)
|
147
|
|
|
16,073
|
|
|
6,456
|
|
|
22,676
|
|
General and administrative expense - acquisition and transaction expenses (C)
|
7,139
|
|
|
677
|
|
|
921
|
|
|
8,737
|
|
Management fee and termination payment to affiliate
|
—
|
|
|
—
|
|
|
21,410
|
|
|
21,410
|
|
Depreciation and amortization
|
44
|
|
|
24,260
|
|
|
—
|
|
|
24,304
|
|
Pre-opening costs (D)
|
320
|
|
|
—
|
|
|
—
|
|
|
320
|
|
Impairment and other losses
|
—
|
|
|
—
|
|
|
60
|
|
|
60
|
|
Realized and unrealized loss on investments
|
—
|
|
|
199
|
|
|
6,044
|
|
|
6,243
|
|
Total operating costs
|
7,650
|
|
|
294,964
|
|
|
34,891
|
|
|
337,505
|
|
Operating loss
|
(7,650
|
)
|
|
(2,370
|
)
|
|
(34,891
|
)
|
|
(44,911
|
)
|
Other income (expenses)
|
|
|
|
|
|
|
|
Interest and investment income
|
—
|
|
|
159
|
|
|
23,003
|
|
|
23,162
|
|
Interest expense (E)
|
—
|
|
|
(15,523
|
)
|
|
(4,304
|
)
|
|
(19,827
|
)
|
Capitalized interest (E)
|
—
|
|
|
246
|
|
|
—
|
|
|
246
|
|
Other (loss) income, net
|
—
|
|
|
(1,762
|
)
|
|
1,856
|
|
|
94
|
|
Total other income (expenses)
|
—
|
|
|
(16,880
|
)
|
|
20,555
|
|
|
3,675
|
|
Income tax expense
|
—
|
|
|
—
|
|
|
965
|
|
|
965
|
|
Net loss
|
(7,650
|
)
|
|
(19,250
|
)
|
|
(15,301
|
)
|
|
(42,201
|
)
|
Preferred dividends
|
—
|
|
|
—
|
|
|
(5,580
|
)
|
|
(5,580
|
)
|
Loss applicable to common stockholders
|
$
|
(7,650
|
)
|
|
$
|
(19,250
|
)
|
|
$
|
(20,881
|
)
|
|
$
|
(47,781
|
)
|
|
|
|
|
|
|
|
|
Additions to property and equipment (including finance leases) during the year ended December 31, 2017
|
$
|
27,295
|
|
|
$
|
16,284
|
|
|
$
|
67
|
|
|
$
|
43,646
|
|
|
|
(A)
|
Operating expenses includes rental expenses recorded under operating leases for carts and equipment in the amount of $0.9 million, $1.9 million and $3.0 million for the years ended December 31, 2019, 2018 and 2017, respectively.
|
|
|
(B)
|
General and administrative expenses include severance expense in the amount of $2.3 million, $0.1 million and zero for the years ended December 31, 2019, 2018 and 2017, respectively.
|
|
|
(C)
|
Acquisition and transaction expense includes costs related to completed and potential acquisitions and transactions and strategic initiatives which may include advisory, legal, accounting and other professional or consulting fees.
|
|
|
(D)
|
Pre-opening costs are expensed as incurred and consist primarily of site-related marketing expenses, lease expense, employee payroll, travel and related expenses, training costs, food, beverage and other operating expenses incurred prior to opening an Entertainment Golf venue.
|
|
|
(E)
|
Interest expense includes the accretion of membership deposit liabilities in the amount of $7.2 million, $6.9 million and $6.5 million for the years ended December 31, 2019, 2018 and 2017, respectively. Interest expense and capitalized interest total to interest expense, net on the Consolidated Statements of Operations.
|
|
|
(F)
|
Total assets in the corporate segment includes an equity method investment in the amount of $24.0 million and $22.6 million as of December 31, 2019 and 2018, respectively, recorded in other investments on the Consolidated Balance Sheets. See Note 2 for additional information.
|
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 and 2017
(dollars in tables in thousands, except per share data)
5. PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION
The following table summarizes the Company's property and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
Gross Carrying Amount
|
|
Accumulated Depreciation
|
|
Net Carrying Value
|
|
Gross Carrying Amount
|
|
Accumulated Depreciation
|
|
Net Carrying Value
|
Land
|
$
|
6,770
|
|
|
$
|
—
|
|
|
$
|
6,770
|
|
|
$
|
6,747
|
|
|
$
|
—
|
|
|
$
|
6,747
|
|
Buildings and improvements
|
147,146
|
|
|
(36,349
|
)
|
|
110,797
|
|
|
78,833
|
|
|
(30,540
|
)
|
|
48,293
|
|
Furniture, fixtures and equipment
|
52,327
|
|
|
(19,484
|
)
|
|
32,843
|
|
|
26,726
|
|
|
(16,729
|
)
|
|
9,997
|
|
Finance leases - equipment
|
36,166
|
|
|
(16,047
|
)
|
|
20,119
|
|
|
28,745
|
|
|
(12,843
|
)
|
|
15,902
|
|
Construction in progress
|
9,112
|
|
|
—
|
|
|
9,112
|
|
|
51,666
|
|
|
—
|
|
|
51,666
|
|
Total Property and Equipment
|
$
|
251,521
|
|
|
$
|
(71,880
|
)
|
|
$
|
179,641
|
|
|
$
|
192,717
|
|
|
$
|
(60,112
|
)
|
|
$
|
132,605
|
|
Depreciation is calculated on a straight line basis using the estimated useful lives detailed in Note 2. Depreciation expense, which included amortization of assets recorded under finance leases, was $19.3 million, $16.0 million and $21.0 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Below is a summary of the activity related to leased and managed Traditional Golf properties.
|
|
|
|
|
|
|
|
Date
|
|
Location
|
|
Leased or Managed Property
|
|
Description
|
February 2018
|
|
Oklahoma
|
|
Leased
|
|
agreement terminated
|
June 2018
|
|
California
|
|
Leased
|
|
agreement terminated, 10 year management agreement executed
|
September 2018
|
|
Texas
|
|
Leased
|
|
agreement terminated
|
November 2018
|
|
California
|
|
Leased
|
|
agreement expired
|
December 2018
|
|
Michigan
|
|
Managed
|
|
agreement terminated, course closing
|
July 2019
|
|
California
|
|
Managed
|
|
agreement executed
|
October 2019
|
|
California
|
|
Managed
|
|
agreement terminated, course closing
|
December 2019
|
|
California
|
|
Managed
|
|
agreement terminated, course closing
|
On March 7, 2018, the Company announced it was actively pursuing the sale of 26 owned Traditional Golf properties in order to generate capital to invest in the growth of the Entertainment Golf business. The assets and associated liabilities are reported on the Consolidated Balance Sheets as “Real estate assets, held-for-sale, net” and “Real estate liabilities, held-for-sale,” respectively. See Note 15 for additional information.
In October 2018, we reclassified a golf property in New Mexico from held-for sale to held-and-used and recorded catch-up depreciation expense.
As of December 31, 2019, the real estate assets, held-for-sale, net are reported at a carrying value of $16.9 million and include $12.6 million of land, $3.9 million of buildings and improvements, $0.2 million of furniture, fixtures and equipment, and $0.2 million of other related assets. The real estate liabilities, held-for-sale include golf course liabilities to be assumed, primarily prepaid membership dues.
Below is a summary of the Traditional Golf properties sold during 2018 and 2019 (in millions).
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 and 2017
(dollars in tables in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended
|
|
Number of Golf Properties Sold
|
|
Sale Price
|
|
Net Proceeds (A)
|
|
Transaction Costs
|
|
Carrying Value
|
|
Gain (Loss) (B)
|
|
Management Agreements Executed Subsequent to Sale
|
September 30, 2018
|
|
1
|
|
|
$
|
3.5
|
|
|
$
|
3.2
|
|
|
$
|
—
|
|
|
$
|
3.3
|
|
|
$
|
(0.1
|
)
|
|
—
|
|
December 31, 2018 (C)
|
|
12
|
|
|
$
|
86.2
|
|
|
$
|
73.5
|
|
|
$
|
1.2
|
|
|
$
|
62.7
|
|
|
$
|
10.8
|
|
|
8
|
|
March 31, 2019 (D)
|
|
3
|
|
|
$
|
28.7
|
|
|
$
|
25.5
|
|
|
$
|
0.5
|
|
|
$
|
20.3
|
|
|
$
|
5.2
|
|
|
1
|
|
June 30, 2019 (E)
|
|
4
|
|
|
$
|
19.7
|
|
|
$
|
17.9
|
|
|
$
|
0.8
|
|
|
$
|
18.3
|
|
|
$
|
(0.4
|
)
|
|
1
|
|
September 30, 2019
|
|
1
|
|
|
$
|
12.5
|
|
|
$
|
12.3
|
|
|
$
|
0.2
|
|
|
$
|
5.2
|
|
|
$
|
7.0
|
|
|
1
|
|
December 31, 2019
|
|
3
|
|
|
$
|
19.1
|
|
|
$
|
18.6
|
|
|
$
|
0.4
|
|
|
$
|
10.9
|
|
|
$
|
7.7
|
|
|
2
|
|
|
|
(A)
|
Net proceeds are inclusive of transaction costs.
|
|
|
(B)
|
The gain (loss) on sale is recorded in other income (loss), net on the Consolidated Statements of Operations.
|
|
|
(C)
|
The difference between the sales price and the net proceeds was primarily due to prepaid membership dues that we are obligated to remit to the buyer. The Company received proceeds of $75.7 million as of December 31, 2018 and recorded $2.2 million of net payables related to the sales, which was settled in the first quarter of 2019.
|
|
|
(D)
|
The Company received sale proceeds of $17.7 million during the three months ended March 31, 2019, consisting of $18.2 million for the golf properties sold during the three months ended March 31, 2019, and $2.2 million for golf properties that were sold during December 2018, less $2.7 million that was remitted to buyers for golf properties that were sold during December 2018. The Company previously received a $9.4 million cash deposit in 2018 related to a golf property that was sold in 2019. The difference between the sales price and the net proceeds was primarily due to prepaid membership dues that we are obligated to remit to the buyer, including $2.1 million payable to the buyer of a golf property sold during the three months ended March 31, 2019.
|
|
|
(E)
|
The Company received sale proceeds of $14.9 million during the three months ended June 30, 2019, consisting of $18.4 million for the golf properties sold during the three months ended June 30, 2019, less $3.5 million that was remitted to buyers for golf properties that were sold in 2018 and the first quarter of 2019.
|
6. LEASES
On January 1, 2019, the Company adopted ASU 2016-02 using a modified retrospective approach, resulting in the recognition of operating lease right-of-use assets and operating lease liabilities of $225.6 million and $205.9 million, respectively, with the difference primarily due to reclassifications of leasehold intangibles and an adjustment to accumulated deficit.
The Company's commitments under lease arrangements are primarily ground leases for Entertainment Golf venues and Traditional Golf properties and related facilities, office leases and leases for golf carts and equipment. The majority of lease terms for our Entertainment Golf venues and Traditional Golf properties and related facilities initially range from 10 to 20 years, and include up to eight 5-year renewal options. In addition to minimum payments, certain leases require payment of the excess of various percentages of gross revenue or net operating income over the minimum rental payments. The leases generally require the payment of taxes assessed against the leased property and the cost of insurance and maintenance. Certain leases include scheduled increases or decreases in minimum rental payments at various times during the term of the lease.
Equipment and golf cart leases initially range between 24 to 66 months and typically contain renewal options which may be on a month-to-month basis.
An option to renew a lease is included in the determination of the ROU asset and lease liability when it is reasonably certain that the renewal option will be exercised.
Lease related costs recognized in the Consolidated Statements of Operations for the year ended December 31, 2019 are as follows:
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 and 2017
(dollars in tables in thousands, except per share data)
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
Finance lease cost
|
|
|
Amortization of right-of-use assets
|
|
$
|
6,305
|
|
Interest on lease liabilities
|
|
1,313
|
|
Total finance lease cost
|
|
7,618
|
|
|
|
|
Operating lease cost
|
|
|
Operating lease cost
|
|
36,236
|
|
Short-term lease cost
|
|
2,288
|
|
Variable lease cost
|
|
16,667
|
|
Total operating lease cost
|
|
55,191
|
|
Total lease cost
|
|
$
|
62,809
|
|
Other information related to leases included on the Consolidated Balance Sheet as of and for the year ended December 31, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Financing Leases
|
Right-of-use assets
|
|
$
|
215,308
|
|
|
$
|
20,119
|
|
Lease liabilities
|
|
$
|
204,597
|
|
|
$
|
19,079
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
|
Operating cash flows
|
|
$
|
30,309
|
|
|
$
|
1,313
|
|
Financing cash flows
|
|
N/A
|
|
|
$
|
7,440
|
|
Right-of-use assets obtained in exchange for lease liabilities
|
|
$
|
10,813
|
|
|
$
|
12,776
|
|
Weighted average remaining lease term
|
|
12.7 years
|
|
|
3.5 years
|
|
Weighted average discount rate
|
|
8.8
|
%
|
|
7.3
|
%
|
Future minimum lease payments under non-cancellable leases as of December 31, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Financing Leases
|
2020
|
|
$
|
33,151
|
|
|
$
|
7,222
|
|
2021
|
|
32,515
|
|
|
5,881
|
|
2022
|
|
31,133
|
|
|
4,290
|
|
2023
|
|
30,962
|
|
|
3,263
|
|
2024
|
|
24,864
|
|
|
1,039
|
|
Thereafter
|
|
205,108
|
|
|
33
|
|
Total minimum lease payments
|
|
357,733
|
|
|
21,728
|
|
Less: imputed interest
|
|
153,136
|
|
|
2,649
|
|
Total lease liabilities
|
|
$
|
204,597
|
|
|
$
|
19,079
|
|
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 and 2017
(dollars in tables in thousands, except per share data)
7. INTANGIBLES, NET OF ACCUMULATED AMORTIZATION
The following table summarizes the Company's intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
Trade name
|
$
|
700
|
|
|
$
|
(140
|
)
|
|
$
|
560
|
|
|
$
|
700
|
|
|
$
|
(117
|
)
|
|
$
|
583
|
|
Leasehold intangibles (A) (B)
|
—
|
|
|
—
|
|
|
—
|
|
|
46,581
|
|
|
(20,270
|
)
|
|
26,311
|
|
Management contracts
|
32,331
|
|
|
(17,342
|
)
|
|
14,989
|
|
|
32,932
|
|
|
(15,174
|
)
|
|
17,758
|
|
Internally-developed software
|
252
|
|
|
(27
|
)
|
|
225
|
|
|
2,314
|
|
|
(967
|
)
|
|
1,347
|
|
Membership base
|
5,236
|
|
|
(4,488
|
)
|
|
748
|
|
|
5,236
|
|
|
(3,740
|
)
|
|
1,496
|
|
Nonamortizable liquor licenses
|
1,043
|
|
|
—
|
|
|
1,043
|
|
|
893
|
|
|
—
|
|
|
893
|
|
Total intangibles
|
$
|
39,562
|
|
|
$
|
(21,997
|
)
|
|
$
|
17,565
|
|
|
$
|
88,656
|
|
|
$
|
(40,268
|
)
|
|
$
|
48,388
|
|
|
|
(A)
|
The amortization expense for leasehold intangibles is reported in operating expenses in the Consolidated Statements of Operations.
|
|
|
(B)
|
As of January 1, 2019, leasehold intangibles were reclassified from "Intangibles, net of accumulated amortization" to "Operating lease right-of-use assets" in the Consolidated Balance Sheet as part of the adoption of ASU 2016-02.
|
Amortization expense for the years ended December 31, 2019, 2018, and 2017 was $3.4 million, $8.0 million and $8.2 million, respectively.
The unamortized balance of intangible assets at December 31, 2019 is expected to be amortized as follows:
|
|
|
|
|
2020
|
$
|
2,941
|
|
2021
|
1,827
|
|
2022
|
1,571
|
|
2023
|
1,566
|
|
2024
|
1,090
|
|
Thereafter
|
7,527
|
|
Total amortizable intangible assets
|
16,522
|
|
Nonamortizable liquor licenses
|
1,043
|
|
Total intangible assets
|
$
|
17,565
|
|
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 and 2017
(dollars in tables in thousands, except per share data)
8. DEBT OBLIGATIONS
The following table presents certain information regarding the Company's debt obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Obligation/Collateral
|
|
Month Issued
|
|
Outstanding Face Amount
|
|
Carrying Value
|
|
Final Stated Maturity
|
|
Weighted Average Coupon
|
|
Weighted Average Funding Cost (A)
|
|
Weighted Average Life (Years)
|
|
Face Amount of Floating Rate Debt
|
|
Outstanding Face Amount
|
|
Carrying Value
|
Credit Facilities and Finance Leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vineyard II
|
|
Dec 1993
|
|
200
|
|
|
200
|
|
|
Dec 2043
|
|
2.80%
|
|
2.80
|
%
|
|
24.0
|
|
200
|
|
|
200
|
|
|
200
|
|
Finance Leases (Equipment)
|
|
June 2014 - Dec 2019
|
|
19,079
|
|
|
19,079
|
|
|
Jan 2020 - Jul 2025
|
|
3.00% to 15.00%
|
|
7.27
|
%
|
|
3.5
|
|
—
|
|
|
15,778
|
|
|
15,778
|
|
|
|
|
|
19,279
|
|
|
19,279
|
|
|
|
|
|
|
7.22
|
%
|
|
3.7
|
|
200
|
|
|
15,978
|
|
|
15,978
|
|
Less current portion of obligations under finance leases
|
|
|
|
6,154
|
|
|
6,154
|
|
|
|
|
|
|
|
|
|
|
|
|
5,489
|
|
|
5,489
|
|
Credit facilities and obligations under finance leases - noncurrent
|
|
|
|
13,125
|
|
|
13,125
|
|
|
|
|
|
|
|
|
|
|
|
|
10,489
|
|
|
10,489
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior subordinated notes payable (B)
|
|
Mar 2006
|
|
51,004
|
|
|
51,192
|
|
|
Apr 2035
|
|
3-mon LIBOR+2.25%
|
|
4.15
|
%
|
|
15.3
|
|
51,004
|
|
|
51,004
|
|
|
51,200
|
|
Total debt obligations
|
|
|
|
$
|
70,283
|
|
|
$
|
70,471
|
|
|
|
|
|
|
4.99
|
%
|
|
12.1
|
|
$
|
51,204
|
|
|
$
|
66,982
|
|
|
$
|
67,178
|
|
|
|
(A)
|
Including the effect of deferred financing cost.
|
|
|
(B)
|
Collateral for this obligation is the Company's general credit.
|
Credit Facilities
Traditional Golf is obligated under a $0.2 million loan with the City of Escondido, California (“Vineyard II”). The principal amount of the loan is payable in five equal installments upon reaching the "Achievement Date”, which is the date on which the previous 36-month period equals or exceeds 240,000 rounds of golf played on the property. As of December 31, 2019, 240,000 rounds of golf have not been achieved within an applicable 36-month period. The interest rate is adjusted annually and is equal to 1% plus a short-term investment return, as defined in the loan agreement. As of December 31, 2019, the interest rate is 2.80%.
Finance Leases - Equipment
The Company leases certain golf carts and other equipment under finance lease agreements. The agreements typically provide for minimum rentals plus executory costs. Lease terms range from 24-66 months. Certain leases include bargain purchase options at lease expiration.
See Note 6 for the future minimum lease payments required under the finance leases and the present value of the net minimum lease payments as of December 31, 2019.
Maturity Table
The Company’s debt obligations have contractual maturities as follows:
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 and 2017
(dollars in tables in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecourse
|
|
Recourse
|
|
Total
|
2020
|
$
|
6,063
|
|
|
$
|
—
|
|
|
$
|
6,063
|
|
2021
|
5,088
|
|
|
—
|
|
|
5,088
|
|
2022
|
3,829
|
|
|
—
|
|
|
3,829
|
|
2023
|
3,060
|
|
|
—
|
|
|
3,060
|
|
2024
|
1,006
|
|
|
—
|
|
|
1,006
|
|
Thereafter
|
233
|
|
|
51,004
|
|
|
51,237
|
|
Total
|
$
|
19,279
|
|
|
$
|
51,004
|
|
|
$
|
70,283
|
|
9. REAL ESTATE SECURITIES
The following is a summary of the Company’s real estate security at December 31, 2019 and 2018, which is classified as available-for-sale and is, therefore, reported at fair value with changes in fair value recorded in other comprehensive income, except if the security is other-than-temporarily impaired.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost Basis
|
|
Gross Unrealized
|
|
|
|
|
|
Weighted Average
|
Asset Type
|
|
Outstanding
Face Amount
|
|
Before
Impairment
|
|
Other-Than-
Temporary-
Impairment
|
|
After
Impairment
|
|
Gains
|
|
Losses
|
|
Carrying Value
(A)
|
|
Number of
Securities
|
|
Rating
(B)
|
|
Coupon
|
|
Yield
|
|
Life
(Years)
(C)
|
|
Principal
Subordination
(D)
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABS - Non-Agency RMBS (E)
|
|
$
|
4,000
|
|
|
$
|
2,863
|
|
|
$
|
(1,521
|
)
|
|
$
|
1,342
|
|
|
$
|
1,710
|
|
|
$
|
—
|
|
|
$
|
3,052
|
|
|
1
|
|
CCC
|
|
2.18
|
%
|
|
29.70
|
%
|
|
4.0
|
|
44.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABS - Non-Agency RMBS (E)
|
|
$
|
4,000
|
|
|
$
|
2,596
|
|
|
$
|
(1,521
|
)
|
|
$
|
1,075
|
|
|
$
|
1,878
|
|
|
$
|
—
|
|
|
$
|
2,953
|
|
|
1
|
|
CCC
|
|
2.90
|
%
|
|
26.65
|
%
|
|
4.9
|
|
38.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
See Note 10 regarding the estimation of fair value, which is equal to carrying value for all securities.
|
|
|
(B)
|
Represents the weighted average of the ratings of all securities in each asset type, expressed as an S&P equivalent rating. For each security rated by multiple rating agencies, the lowest rating is used. Ratings provided were determined by third party rating agencies, represent the most recent credit ratings available as of the reporting date and may not be current.
|
|
|
(C)
|
The weighted average life is based on the timing of expected cash flows on the assets.
|
|
|
(D)
|
Percentage of the outstanding face amount of the security and residual interest that is subordinate to the Company’s investment.
|
|
|
(E)
|
The ABS - Non-Agency RMBS is a floating rate security and the collateral securing it is located in various geographic regions in the U.S. The Company does not have significant investments in any one geographic region.
|
Unrealized losses that are considered other-than-temporary are recognized currently in earnings. During the year ended December 31, 2017, the Company recorded other-than-temporary impairment charges (“OTTI”) of $0.6 million, recorded in "Realized and unrealized (gain) loss on investments" in the Consolidated Statements of Operations. The Company recorded no OTTI during the years ended December 31, 2019 and 2018. Based on management’s analysis of the securities, the performance of the underlying loans and changes in market factors, the Company noted adverse changes in the expected cash flows on certain of these securities and concluded that they were other-than-temporarily impaired. The Company had no securities in an unrealized loss position as of December 31, 2019. The Company had no activity related to credit losses on securities for the years ended December 31, 2019 and 2018.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 and 2017
(dollars in tables in thousands, except per share data)
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes the carrying values and estimated fair values of the Company’s financial instruments at December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
December 31, 2018
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
|
Fair Value Method (A)
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
Assets
|
|
|
|
|
|
|
|
|
|
Real estate securities, available-for-sale
|
$
|
3,052
|
|
|
$
|
3,052
|
|
|
Pricing models - Level 3
|
|
$
|
2,953
|
|
|
$
|
2,953
|
|
Cash and cash equivalents
|
28,423
|
|
|
28,423
|
|
|
|
|
79,235
|
|
|
79,235
|
|
Restricted cash - current and noncurrent
|
3,541
|
|
|
3,541
|
|
|
|
|
3,584
|
|
|
3,584
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Junior subordinated notes payable
|
51,192
|
|
|
24,382
|
|
|
Pricing models - Level 3
|
|
51,200
|
|
|
28,396
|
|
|
|
(A)
|
Pricing models are used for (i) real estate securities that are not traded in an active market, and, therefore, have little or no price transparency, and for which significant unobservable inputs must be used in estimating fair value, or (ii) debt obligations which are private and untraded.
|
Fair Value Measurements
Valuation Hierarchy
The fair value of financial instruments is categorized based on the priority of the inputs to the valuation technique and categorized into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The Company follows this hierarchy for its financial instruments measured at fair value.
Level 1 - Quoted prices in active markets for identical instruments.
Level 2 - Valuations based principally on observable market parameters, including:
•quoted prices for similar assets or liabilities in active markets,
|
|
•
|
inputs other than quoted prices that are observable for the asset or liability (such as interest rates and yield curves observable at commonly quoted intervals, implied volatilities and credit spreads), and
|
•market corroborated inputs (derived principally from or corroborated by observable market data).
Level 3 - Valuations determined using unobservable inputs that are supported by little or no market activity, and that are significant to the overall fair value measurement.
The Company’s real estate securities and debt obligations are currently not traded in active markets and therefore have little or no price transparency. As a result, the Company has estimated the fair value of these illiquid instruments based on internal pricing models subject to the Company's controls described below.
The Company has various processes and controls in place to ensure that fair value measurements are reasonably estimated. With respect to broker and pricing service quotations, and in order to ensure these quotes represent a reasonable estimate of fair value, the Company’s quarterly procedures include a comparison of such quotations to quotations from different sources, outputs generated from its internal pricing models and transactions completed, as well as on its knowledge and experience of these markets. With respect to fair value estimates generated based on the Company’s internal pricing models, the Company’s management validates the inputs and outputs of the internal pricing models by comparing them to available independent third-party market parameters and models, where available, for reasonableness. The Company believes its valuation methods and the assumptions used are appropriate and consistent with other market participants.
Fair value measurements categorized within Level 3 are sensitive to changes in the assumptions or methodologies used to determine fair value and such changes could result in a significant increase or decrease in the fair value. For the Company’s investments in real estate securities categorized within Level 3 of the fair value hierarchy, the significant unobservable inputs include the discount rates, assumptions relating to prepayments, default rates and loss severities.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 and 2017
(dollars in tables in thousands, except per share data)
Significant Unobservable Inputs
The following table provides quantitative information regarding the significant unobservable inputs used by the Company for assets and liabilities measured at fair value on a recurring basis as of December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Significant Input
|
Asset Type
|
|
Amortized
Cost
Basis
|
|
Fair
Value
|
|
Discount Rate
|
|
Prepayment Speed
|
|
Cumulative Default Rate
|
|
Loss Severity
|
ABS - Non-Agency RMBS
|
|
$
|
1,342
|
|
|
$
|
3,052
|
|
|
10.0
|
%
|
|
8.0
|
%
|
|
2.6
|
%
|
|
70.0
|
%
|
Total
|
|
$
|
1,342
|
|
|
$
|
3,052
|
|
|
|
|
|
|
|
|
|
All of the inputs used have some degree of market observability, based on the Company’s knowledge of the market, relationships with market participants, and use of common market data sources. Collateral prepayment, default and loss severity projections are in the form of “curves” or “vectors” that vary for each monthly collateral cash flow projection. Methods used to develop these projections vary by asset class but conform to industry conventions. The Company uses assumptions that generate its best estimate of future cash flows of each respective security.
Real estate securities measured at fair value on a recurring basis using Level 3 inputs changed as follows:
|
|
|
|
|
|
|
|
ABS - Non-Agency RMBS
|
|
|
|
Balance at December 31, 2017
|
|
$
|
2,294
|
|
Total gains (losses) (A)
|
|
|
Included in other comprehensive income (loss)
|
|
508
|
|
Amortization included in interest income
|
|
246
|
|
Purchases, sales and repayments (A)
|
|
|
Proceeds
|
|
(95
|
)
|
Balance at December 31, 2018
|
|
$
|
2,953
|
|
Total gains (losses) (A)
|
|
|
Included in other comprehensive income (loss)
|
|
(168
|
)
|
Amortization included in interest income
|
|
375
|
|
Purchases, sales and repayments (A)
|
|
|
Proceeds
|
|
(108
|
)
|
Balance at December 31, 2019
|
|
$
|
3,052
|
|
|
|
(A)
|
None of the gains (losses) recorded in earnings during the periods is attributable to the change in unrealized gains (losses) relating to Level 3 assets still held at the reporting dates. There were no purchases or sales during the years ended December 31, 2019 and 2018. There were no transfers into or out of Level 3 during the years ended December 31, 2019 and 2018.
|
Liabilities for Which Fair Value is Only Disclosed
The following table summarizes the level of the fair value hierarchy, valuation techniques and inputs used for estimating each class of liabilities not measured at fair value in the statement of financial position but for which fair value is disclosed:
|
|
|
|
|
|
|
Type of Liabilities
|
|
|
|
|
Not Measured At Fair Value
|
|
Fair Value
|
|
|
for Which Fair Value Is Disclosed
|
|
Hierarchy
|
|
Valuation Techniques and Significant Inputs
|
Junior subordinated notes payable
|
|
Level 3
|
|
Valuation technique is based on discounted cash flows. Significant inputs include:
|
|
|
|
|
•
|
Amount and timing of expected future cash flows
|
|
|
|
|
•
|
Interest rates
|
|
|
|
|
•
|
Market yields and the credit spread of the Company
|
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 and 2017
(dollars in tables in thousands, except per share data)
11. EQUITY AND EARNINGS PER SHARE
Earnings per Share
The Company is required to present both basic and diluted earnings per share (“EPS”). The following table shows the amounts used in computing basic and diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Numerator for basic and diluted earnings per share:
|
|
|
|
|
|
|
Loss from continuing operations after preferred dividends
|
|
$
|
(60,434
|
)
|
|
$
|
(44,263
|
)
|
|
$
|
(47,781
|
)
|
Loss Applicable to Common Stockholders
|
|
$
|
(60,434
|
)
|
|
$
|
(44,263
|
)
|
|
$
|
(47,781
|
)
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
Denominator for basic earnings per share - weighted average shares
|
|
67,039,556
|
|
|
66,993,543
|
|
|
66,903,457
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
Options
|
|
—
|
|
|
—
|
|
|
—
|
|
RSUs
|
|
—
|
|
|
—
|
|
|
—
|
|
Denominator for diluted earnings per share - adjusted weighted average shares
|
|
67,039,556
|
|
|
66,993,543
|
|
|
66,903,457
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
Loss from continuing operations per share of common stock after preferred dividends
|
|
$
|
(0.90
|
)
|
|
$
|
(0.66
|
)
|
|
$
|
(0.71
|
)
|
Loss Applicable to Common Stock, per share
|
|
$
|
(0.90
|
)
|
|
$
|
(0.66
|
)
|
|
$
|
(0.71
|
)
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
Loss from continuing operations per share of common stock after preferred dividends
|
|
$
|
(0.90
|
)
|
|
$
|
(0.66
|
)
|
|
$
|
(0.71
|
)
|
Loss Applicable to Common Stock, per share
|
|
$
|
(0.90
|
)
|
|
$
|
(0.66
|
)
|
|
$
|
(0.71
|
)
|
Basic EPS is calculated by dividing net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding during each period. Diluted EPS is calculated by dividing net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding plus the additional dilutive effect of dilutive securities during each period. The Company’s dilutive securities are its options and RSUs. During 2019, 2018, and 2017, based on the treasury stock method, the Company had 2,113,022; 2,718,704; and 1,749,596 potentially dilutive securities, respectively, which were excluded due to the Company's loss position. During 2019, 2018 and 2017, the Company had: 396,146; 88,023; and 201,430 antidilutive options, respectively. Net income (loss) applicable to common stockholders is equal to net income (loss) less preferred dividends.
Common Stock Issuances
In 2017, the Company issued a total of 152,800 shares of its common stock to its independent directors as a component of their annual compensation.
In 2018, the Company issued a total of 50,000 shares of its common stock to an independent director as part of the Director Stock Program described below.
In 2019, the Company issued a total of 6,000 shares of its common stock to an independent director as part of the Director Stock Program.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 and 2017
(dollars in tables in thousands, except per share data)
In 2019, the Company issued a total of 27,099 of its common stock to independent directors upon vesting of RSUs that were granted in 2018.
In 2019, the Company issued a total of 8,548 shares of its common stock to employees upon vesting of RSUs that were granted in 2019.
Incentive and Option Plans
The Drive Shack Inc. 2018 Omnibus Incentive Plan (the "2018 Plan") was effective upon approval by our shareholders in May 2018 and provides for the issuance of equity-based awards in various forms to eligible participants. As of December 31, 2019, the 2018 Plan has 5,343,078 shares available for grant in the aggregate, subject to an annual limitation.
All outstanding options granted under prior option plans will continue to be subject to the terms and conditions set forth in the agreements evidencing such options and the terms of respective option plan. Upon exercise, all options will be settled in an amount of cash equal to the excess of the fair market value of a share of common stock on the date of exercise over the strike price per share, unless advance approval is made to settle the option in shares of common stock.
As detailed in the 2018 Plan, the board of directors may permit a first time non-employee director to make a one-time election to participate in a stock purchase and matching grant program (the "Director Stock Program") which provides that if the non-employee director purchases shares of the Company's common stock at fair value within 30 days following the date the individual becomes a non-employee director, then the Company will issue a matching grant of fully vested shares of common stock equal to 20% of the aggregate fair value of the purchased shares. In 2018, a non-employee director purchased 41,667 shares and the Company issued 8,333 shares representing the matching grant. In 2019, a non-employee director purchased 5,000 shares and the Company issued 1,000 shares representing the matching grant.
Stock Options
The following is a summary of the changes in the Company's outstanding options for the year ended December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options
|
|
Weighted Average Strike Price
|
|
Weighted Average Life Remaining (in years)
|
Balance at December 31, 2018
|
|
8,436,931
|
|
|
$
|
3.72
|
|
|
|
Granted
|
|
695,652
|
|
|
4.66
|
|
|
|
Forfeited (A)
|
|
(2,234,237
|
)
|
|
5.44
|
|
|
|
Balance at December 31, 2019
|
|
6,898,346
|
|
|
$
|
3.26
|
|
|
3.4 years
|
|
|
|
|
|
|
|
Exercisable at December 31, 2019
|
|
4,744,696
|
|
|
$
|
3.26
|
|
|
2.5 years
|
The Company's outstanding options were summarized as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
Held by the former Manager
|
|
3,627,245
|
|
|
2,705,253
|
|
Granted to the former Manager and subsequently transferred to certain Manager’s employees (B)
|
|
1,382,998
|
|
|
2,304,990
|
|
Granted to the independent directors
|
|
333
|
|
|
333
|
|
Granted to Drive Shack employees (A)(C)
|
|
1,887,770
|
|
|
3,426,355
|
|
Total
|
|
6,898,346
|
|
|
8,436,931
|
|
|
|
(A)
|
In 2019, in connection with the former CEO's retirement, the related option awards were modified to accelerate the vesting of 1,117,118 options, subject to a 90-day exercise period which expired on February 9, 2020. The former CEO forfeited
|
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 and 2017
(dollars in tables in thousands, except per share data)
2,234,237 options upon departure. As a result of the modification, the Company reversed $2.1 million in stock compensation expense. The expense for the modified award was recorded at the modification date fair value.
|
|
(B)
|
The Company and the former Manager agreed that options held by certain employees formerly employed by the Manager will not terminate or be forfeited as a result of the Termination and Cooperation Agreement, and the vesting of such options will relate to the relevant holder’s employment with the Company and its affiliates following January 1, 2018. In both February 2017 and April 2018, the former Manager issued 1,152,495 options to certain employees formerly employed by the Manager as part of their compensation. The options fully vest and are exercisable one year prior to the option expiration date, beginning March 2020 through January 2024. In 2019, a certain employee was terminated by the Company and 921,992 options reverted back to the former Manager. The Company reversed $1.2 million in stock compensation expense related to these options.
|
|
|
(C)
|
In 2018, the Company granted 75,000 options to an employee as provided in their employment agreement. The options fully vest on the third anniversary of the grant date. In 2019, the Company granted 695,652 options to an employee that vest and become exercisable in equal annual installment on each of the first three anniversaries of the grant date.
|
The valuation of the employee options has been determined using the Black-Scholes option valuation model. The Black-Scholes option valuation model uses assumptions of expected volatility, expected dividend yield of the Company’s stock, expected term of the awards and the risk-free interest rate. The fair value of the options was determined using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Valuation Date
|
|
January 2018
|
|
April 2018
|
|
November 2018
|
|
April 2019
|
|
November 2019
|
Expected Volatility
|
|
39.73
|
%
|
|
35.66
|
%
|
|
35.4 - 35.8%
|
|
|
36.80
|
%
|
|
44.73
|
%
|
Expected Dividend Yield
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
Expected Remaining Term
|
|
3.0 - 6.6 years
|
|
|
2.7 - 6.3 years
|
|
|
6.0 - 6.5 years
|
|
|
6.0 years
|
|
|
0.3 years
|
|
Risk-Free Rate
|
|
2.16 - 2.29%
|
|
|
2.68 - 2.82%
|
|
|
3.09 - 3.11%
|
|
|
2.34
|
%
|
|
1.57
|
%
|
Fair Value at Valuation Date
|
|
$
|
4,272
|
|
|
$
|
3,558
|
|
|
$
|
7,478
|
|
|
$
|
1,280
|
|
|
$
|
67
|
|
Stock-based compensation expense is recognized on a straight-line basis from grant date through the vesting date of the options. Stock-based compensation expense related to the employee options was $0.6 million (net of the reversals of stock compensation expenses described above) and $2.2 million during the years ended December 31, 2019 and 2018, respectively, and was recorded in general and administrative expense on the Consolidated Statements of Operations. The unrecognized stock-based compensation expense related to the unvested options was $3.4 million as of December 31, 2019 and will be expensed over a weighted average of 2.3 years.
The closing price on the New York Stock Exchange for the Company’s common stock as of December 31, 2019 was $3.66 per share.
Restricted Stock Units (RSUs)
The following is a summary of the changes in the Company's RSUs for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
Number of RSUs
|
|
Weighted Average Grant Date Fair Value (per unit)
|
Balance at December 31, 2018
|
|
54,641
|
|
|
$
|
5.02
|
|
Granted (A)
|
|
635,819
|
|
|
$
|
4.66
|
|
Vested/Released
|
|
(35,647
|
)
|
|
$
|
5.17
|
|
Forfeited (B)
|
|
(134,195
|
)
|
|
$
|
4.68
|
|
Balance at December 31, 2019
|
|
520,618
|
|
|
$
|
4.66
|
|
|
|
(A)
|
The Company's non-employee directors were granted 56,076 RSUs during 2019 as part of the annual compensation. The RSUs are subject to a one year vesting period. The Company granted 579,743 RSUs to employees as part of their annual compensation. The RSUs vest in equal annual installments on each of the first three anniversaries of the grant date.
|
|
|
(B)
|
Unvested RSUs are forfeited by non-employee directors upon their departure from the board of directors and forfeited by employees upon their termination.
|
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 and 2017
(dollars in tables in thousands, except per share data)
Stock-based compensation expense related to the RSUs was $0.7 million and $0.1 million during the years ended December 31, 2019 and 2018, respectively, and was recorded in general and administrative expense on the Consolidated Statements of Operations. The unrecognized stock-based compensation expense related to the unvested RSUs was $1.9 million as of December 31, 2019 and is expected to be recognized over a weighted average of 2.2 years.
Tax Benefits Preservation Plan
On March 6, 2020, our board of directors adopted a Tax Benefits Preservation Plan (the “2020 Tax Plan”) with American Stock Transfer and Trust Company, LLC as rights agent, and the disinterested members of the board of directors declared a dividend distribution of one right for each outstanding share of common stock to stockholders of record at the close of business on March 16, 2020. Each right is governed by the terms of the 2020 Tax Plan and entitles the registered holder to purchase from us a unit consisting of one one-thousandth of a share of Series E Junior Participating Preferred Stock, par value $0.01 per share at a purchase price of $18.00 per unit, subject to adjustment. The 2020 Tax Plan is intended to help protect our ability to use our tax net operating losses and certain other tax assets by deterring an “ownership change” as defined under the Code.
In connection with the adoption of the Tax Benefit Preservation Plan in 2016, our board of directors approved the Articles Supplementary of Series E Junior Participating Preferred Stock, which was filed with the State Department of Assessments and Taxation of Maryland on December 8, 2016.
Preferred Stock
In March 2003, the Company issued 2.5 million shares ($62.5 million face amount) of its 9.75% Series B Cumulative Redeemable Preferred Stock (the “Series B Preferred”). In October 2005, the Company issued 1.6 million shares ($40.0 million face amount) of its 8.05% Series C Cumulative Redeemable Preferred Stock (the “Series C Preferred”). In March 2007, the Company issued 2.0 million shares ($50.0 million face amount) of its 8.375% Series D Cumulative Redeemable Preferred Stock (the “Series D Preferred”). The Series B Preferred, Series C Preferred and Series D Preferred are non-voting, have a $25 per share liquidation preference, no maturity date and no mandatory redemption. The Company has the option to redeem the Series B Preferred, the Series C Preferred and the Series D Preferred, at their liquidation preference. If the Series C Preferred or Series D Preferred cease to be listed on the NYSE or the AMEX, or quoted on the NASDAQ, and the Company is not subject to the reporting requirements of the Exchange Act, the Company has the option to redeem the Series C Preferred or Series D Preferred, as applicable, at their liquidation preference and, during such time any shares of Series C Preferred or Series D Preferred are outstanding, the dividend will increase to 9.05% or 9.375% per annum, respectively.
In connection with the issuance of the Series B Preferred, Series C Preferred and Series D Preferred, the Company incurred approximately $2.4 million, $1.5 million, and $1.8 million of costs, respectively, which were netted against the proceeds of such offerings. If any series of preferred stock were redeemed, the related costs would be recorded as an adjustment to income available for common stockholders at that time.
In March 2010, the Company settled its offer to exchange (the “Exchange Offer”) shares of its common stock and cash for shares of its preferred stock. After settlement of the Exchange Offer, 1,347,321 shares of Series B Preferred Stock, 496,000 shares of Series C Preferred Stock and 620,000 shares of Series D Preferred Stock remain outstanding for trading on the New York Stock Exchange.
As of January 31, 2020, Drive Shack Inc. had paid all current and accrued dividends on its preferred stock.
12. TRANSACTIONS WITH AFFILIATES AND AFFILIATED ENTITIES
Agreements with the Former Manager
On December 21, 2017, the Company entered into definitive agreements with the Manager to internalize the Company’s management (the “Internalization”). In connection with the termination of the existing Management Agreement, the Company made a payment of $10.7 million to the Manager in December 2017. The Internalization became effective on January 1, 2018.
On December 21, 2017, the Company entered into a Transition Services Agreement, effective as of January 1, 2018, with the former Manager. In order to facilitate the transition of the Company’s management of its operations and provide the Company sufficient time to develop such services in-house or to hire other third-party service providers for such services, under the Transition Services Agreement, the former Manager continues to provide to the Company certain services which is referred to in this Annual Report as Transition Services. The Transition Services primarily include information technology, legal, regulatory compliance,
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 and 2017
(dollars in tables in thousands, except per share data)
tax and accounting services. The Transition Services are provided for a fee intended to be equal to the former Manager’s cost of providing the Transition Services, including the allocated cost of, among other things, overhead, employee wages and compensation and out-of-pocket expenses, and will be invoiced on a monthly basis. The Company terminated the Transition Services Agreement during the second quarter of 2019 and incurred $0.1 million and $0.4 million in costs for Transition Services during the years ended December 31, 2019 and 2018, respectively, and these costs are reported in general and administrative expense on the Consolidated Statements of Operations.
At December 31, 2019, Fortress, through its affiliates, and principals of Fortress, owned 7.3 million shares of the Company’s common stock and Fortress, through its affiliates, had options relating to an additional 3.6 million shares of the Company’s common stock (Note 11).
Other Affiliated Entities
A member of the Board of Directors owned or leased aircraft that the Company chartered from a third-party aircraft operator for business purposes in the course of operations. The Company paid the aircraft operator market rates for the charters. These amounts totaled less than $0.1 million for each of the three years ended December 31, 2019, 2018 and 2017.
The Company previously leased corporate office space from an affiliate of a member of the Board of Directors. The Company incurred $0.2 million and $1.1 million in rent expense for the years ended December 31, 2019 and 2018, respectively, which represents market rates for the office space.
The Company agreed to reimburse an affiliate of a member of our board of directors for services of an employee prior to execution
of an employment agreement. The Company incurred $0.2 million for the year ended December 31, 2019, which represents market rates for these services.
13. COMMITMENTS AND CONTINGENCIES
Litigation — The Company exited a leased property and accrued related lease exit costs of approximately $0.8 million in December 2016. The Company subsequently entered into a legal dispute related to this golf property. In June 2018, the Company accrued an additional $6.6 million for a total of $7.4 million to settle this legal dispute, which was recorded in "Accounts payable and accrued expenses" in the Consolidated Balance Sheet. In July 2018, the Company settled the dispute for $7.4 million, with $5.2 million payable immediately and $2.2 million payable in six quarterly installments. The Company paid the quarterly installments in full as of December 31, 2019.
The Company is and may become, from time to time, involved in legal actions in the ordinary course of business, including governmental and administrative investigations, inquiries and proceedings concerning employment, labor, environmental and other claims. Although management is unable to predict with certainty the eventual outcome of any legal action, management believes the ultimate liability arising from such actions, individually and in the aggregate, which existed at December 31, 2019, will not materially affect the Company’s consolidated results of operations, financial position or cash flow. Given the inherent unpredictability of these types of proceedings, however, it is possible that future adverse outcomes could have a material effect on our financial results.
Environmental Costs — As a commercial real estate owner, the Company is subject to potential environmental costs. At December 31, 2019, management of the Company is not aware of any environmental concerns that would have a material adverse effect on the Company’s consolidated financial position or results of operations.
Surety Bonds — The Company is required to maintain bonds under certain third-party agreements, as requested by certain utility providers, and under the rules and regulations of licensing authorities and other governmental agencies. The Company had bonds outstanding of approximately $1.0 million and $2.0 million as of December 31, 2019 and 2018, respectively.
Traditional Golf has four month-to-month property leases which are cancellable by the parties with 30 days written notice. Traditional Golf also has various month-to-month operating leases for carts and equipment. Lease expense is recorded in short-term lease cost as disclosed in Note 6.
Membership Deposit Liability — In the Traditional Golf business, private country club members generally pay an advance initiation fee deposit upon their acceptance as a member to the respective country club. Initiation fee deposits are refundable 30 years after
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 and 2017
(dollars in tables in thousands, except per share data)
the date of acceptance as a member. As of December 31, 2019, the total face amount of initiation fee deposits was approximately $246.0 million.
Restricted Cash — Approximately $3.2 million of restricted cash at December 31, 2019 is used as credit enhancement for Traditional Golf’s obligations related to the performance of lease agreements and certain insurance claims.
Commitments — As of December 31, 2019, the Company has additional operating leases that have not yet commenced of $85.7 million. The leases are expected to commence over the next 12 - 24 months with initial lease terms of approximately 20 years. These leases are primarily real estate leases for future Entertainment Golf venues and the commencement of these leases is contingent on completion of due diligence and satisfaction of certain contingencies which generally occurs prior to construction.
14. INCOME TAXES
The provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Current:
|
|
|
|
|
|
Federal
|
$
|
532
|
|
|
$
|
211
|
|
|
$
|
710
|
|
State and Local
|
109
|
|
|
73
|
|
|
255
|
|
Total Current Provision
|
$
|
641
|
|
|
$
|
284
|
|
|
$
|
965
|
|
Deferred:
|
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State and Local
|
—
|
|
|
—
|
|
|
—
|
|
Total Deferred Provision
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total Provision for Income Taxes
|
$
|
641
|
|
|
$
|
284
|
|
|
$
|
965
|
|
The Company is subject to U.S. federal and state corporate income tax. As of December 31, 2019, the Company has a net operating loss carryforward of approximately $391.6 million that is available to offset future U.S. federal taxable income, if and when it arises. The net operating loss carryforward will begin to expire in 2029. A portion of the net operating loss carryforward may be limited in its use due to certain provisions of the Code, including, but not limited to Section 382, which imposes an annual limit on the amount of net operating loss and net capital loss carryforwards that the Company can use to offset future taxable income.
As of December 31, 2019, the Company has a capital loss carryforward of approximately $27.2 million. The capital loss carryforward will begin to expire in 2022. In addition, the Company has a receivable of $1.1 million related to refundable alternative minimum tax (“AMT”) credits.
The Company and its subsidiaries file U.S. federal and state income tax returns in various jurisdictions. Generally, the Company is no longer subject to tax examinations by tax authorities for years prior to 2016.
The Company has assessed its tax positions for all open years. As of December 31, 2019, the Company reported a total of $1.2 million of unrecognized tax benefits which, if recognized, would affect the Company’s effective tax rate. The Company does not believe that it is reasonably possible that the total amount of unrecognized tax benefits will significantly change within the next twelve months.
A reconciliation of the unrecognized tax benefits is as follows:
|
|
|
|
|
Balance as of December 31, 2018
|
$
|
721
|
|
Increase due to tax positions of current year
|
471
|
|
Balance as of December 31, 2019
|
$
|
1,192
|
|
Generally, the Company’s effective tax rate differs from the federal statutory rate as a result of state and local taxes and changes in the valuation allowance.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 and 2017
(dollars in tables in thousands, except per share data)
The difference between the Company's reported provision for income taxes and the U.S. federal statutory rate of 21% is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
|
2017
|
Provision at the statutory rate
|
21.00
|
%
|
|
21.00
|
%
|
|
35.00
|
%
|
Permanent items
|
(0.62
|
)%
|
|
(1.12
|
)%
|
|
(0.36
|
)%
|
State and local taxes
|
(0.16
|
)%
|
|
(0.15
|
)%
|
|
(0.42
|
)%
|
Valuation allowance
|
(21.11
|
)%
|
|
(19.97
|
)%
|
|
64.46
|
%
|
Effects of change in tax rate
|
—
|
%
|
|
—
|
%
|
|
(101.31
|
)%
|
Unrecognized tax benefits
|
(0.86
|
)%
|
|
(1.84
|
)%
|
|
—
|
%
|
Tax credits
|
—
|
%
|
|
1.36
|
%
|
|
—
|
%
|
Other
|
0.57
|
%
|
|
—
|
%
|
|
0.31
|
%
|
Total benefit
|
(1.18
|
)%
|
|
(0.72
|
)%
|
|
(2.32
|
)%
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of December 31, 2019 and 2018 are presented below:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
Allowance for loan losses
|
$
|
308
|
|
|
$
|
292
|
|
Depreciation and amortization
|
3,939
|
|
|
8,964
|
|
Accrued expenses
|
2,488
|
|
|
2,701
|
|
Interest
|
3,661
|
|
|
3,445
|
|
Operating lease liabilities
|
56,803
|
|
|
—
|
|
Net operating losses
|
107,415
|
|
|
89,903
|
|
Capital losses
|
7,437
|
|
|
7,352
|
|
Deferred revenue
|
2,124
|
|
|
1,960
|
|
Other
|
5,618
|
|
|
5,306
|
|
Total deferred tax assets
|
189,793
|
|
|
119,923
|
|
Less valuation allowance
|
(123,434
|
)
|
|
(104,705
|
)
|
Net deferred tax assets
|
$
|
66,359
|
|
|
$
|
15,218
|
|
Deferred tax liabilities:
|
|
|
|
Leaseholds
|
—
|
|
|
7,025
|
|
Operating lease right-of-use assets
|
59,716
|
|
|
—
|
|
Membership deposit liabilities
|
6,643
|
|
|
8,193
|
|
Total deferred tax liabilities
|
$
|
66,359
|
|
|
$
|
15,218
|
|
Net deferred tax assets
|
$
|
—
|
|
|
$
|
—
|
|
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible.
As of December 31, 2019, the Company recorded a full valuation allowance against its net deferred tax assets as management does not believe that it is more likely than not that the net deferred tax assets will be realized.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 and 2017
(dollars in tables in thousands, except per share data)
The following table summarizes the change in the deferred tax asset valuation allowance:
|
|
|
|
|
Valuation allowance at December 31, 2018
|
$
|
104,705
|
|
Increase due to current year operations
|
18,729
|
|
Valuation allowance at December 31, 2019
|
$
|
123,434
|
|
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. The Tax Act significantly revises the U.S. corporate income tax regime by, among other things, lowering corporate income tax rates and eliminating the AMT for corporate taxpayers. The Company has accounted for the effects of the Tax Act for the year ended December 31, 2017 which relates to the re-measure of deferred tax assets and liabilities due to the reduction in the corporate income tax rate and has booked a non-recurring income tax receivable in the amount of $0.6 million due to refundable AMT credits. Due to the full valuation allowance, the re-measure of deferred tax assets and liabilities had no impact on the income tax provision for the year ended December 31, 2017.
15. IMPAIRMENT AND OTHER LOSSES
The following table summarizes the amounts the Company recorded in the Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Traditional golf properties (held-for-sale)
|
|
$
|
1,227
|
|
|
$
|
7,002
|
|
|
$
|
—
|
|
Traditional golf properties (held-for-use)
|
|
3,805
|
|
|
1,091
|
|
|
—
|
|
Valuation allowance on loans
|
|
—
|
|
|
147
|
|
|
60
|
|
Other losses
|
|
10,381
|
|
|
—
|
|
|
—
|
|
Total impairment
|
|
$
|
15,413
|
|
|
$
|
8,240
|
|
|
$
|
60
|
|
Held-for-Sale Impairment: Upon reclassification in March 2018 (see Note 5), the Company assessed the real estate assets, held-for-sale and determined that the carrying value of one property exceeded the fair value less anticipated costs to sell. In March 2018, the Company recognized an impairment loss totaling approximately $1.3 million. The fair value measurement was based on the pricing in a letter of intent and internal valuation models.
In 2018, the Company recognized impairment loss and recorded accumulated impairment totaling approximately $5.7 million for four golf properties. The fair value measurements were based on executed purchase agreements or letters of intent that the Company intended to pursue. In 2019, the Company recognized impairment losses and recorded accumulated impairment totaling approximately $1.2 million for three golf properties. The fair value measurements were based on expected selling prices, less costs to sell.
The significant inputs used to value these real estate assets fall within Level 3 for fair value reporting.
Held for Use Impairment: In 2018, the Company recorded impairment charges totaling approximately $1.1 million primarily related to three golf properties. In 2019, the Company recorded impairment charges totaling $3.8 million for two golf properties.
The Company evaluated the recoverability of the carrying value of these assets using the income approach based on future assumptions of cash flows. As the fair value inputs utilized are unobservable, the Company determined that the significant inputs used to value these properties falls within Level 3 for fair value reporting.
Other Losses: For the year ended December 31, 2019, the Company recorded loss on asset retirements of $10.4 million primarily due to the Company's decision to discontinue the use of certain software and equipment at our Entertainment Golf venues, including the renovations at the Orlando venue.
DRIVE SHACK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 and 2017
(dollars in tables in thousands, except per share data)
16. SUMMARY QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
Quarter Ended
|
|
Year Ended
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
December 31
|
Total revenues
|
$
|
53,952
|
|
|
$
|
71,615
|
|
|
$
|
74,682
|
|
|
$
|
71,815
|
|
|
$
|
272,064
|
|
Total operating costs
|
72,231
|
|
|
83,171
|
|
|
92,010
|
|
|
91,936
|
|
|
339,348
|
|
Operating loss (income)
|
(18,279
|
)
|
|
(11,556
|
)
|
|
(17,328
|
)
|
|
(20,121
|
)
|
|
(67,284
|
)
|
Total other income (expenses)
|
3,679
|
|
|
(1,403
|
)
|
|
5,471
|
|
|
5,324
|
|
|
13,071
|
|
Income tax expense
|
—
|
|
|
—
|
|
|
162
|
|
|
479
|
|
|
641
|
|
Net loss
|
(14,600
|
)
|
|
(12,959
|
)
|
|
(12,019
|
)
|
|
(15,276
|
)
|
|
(54,854
|
)
|
Preferred dividends
|
(1,395
|
)
|
|
(1,395
|
)
|
|
(1,395
|
)
|
|
(1,395
|
)
|
|
(5,580
|
)
|
Loss applicable to common stockholders
|
$
|
(15,995
|
)
|
|
$
|
(14,354
|
)
|
|
$
|
(13,414
|
)
|
|
$
|
(16,671
|
)
|
|
$
|
(60,434
|
)
|
Loss applicable to common stock, per share
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.24
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.90
|
)
|
Diluted
|
$
|
(0.24
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.90
|
)
|
Weighted average number of shares of common stock outstanding
|
|
|
|
|
|
|
|
|
|
Basic
|
67,027,104
|
|
|
67,029,610
|
|
|
67,040,692
|
|
|
67,060,440
|
|
|
67,039,556
|
|
Diluted
|
67,027,104
|
|
|
67,029,610
|
|
|
67,040,692
|
|
|
67,060,440
|
|
|
67,039,556
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
Quarter Ended
|
|
Year Ended
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
December 31
|
Total revenues
|
$
|
66,660
|
|
|
$
|
91,004
|
|
|
$
|
87,419
|
|
|
$
|
69,286
|
|
|
$
|
314,369
|
|
Total operating costs
|
78,946
|
|
|
87,976
|
|
|
94,619
|
|
|
79,262
|
|
|
340,803
|
|
Operating loss (income)
|
(12,286
|
)
|
|
3,028
|
|
|
(7,200
|
)
|
|
(9,976
|
)
|
|
(26,434
|
)
|
Total other income (expenses)
|
(4,009
|
)
|
|
(7,831
|
)
|
|
(6,875
|
)
|
|
6,750
|
|
|
(11,965
|
)
|
Income tax expense (benefit)
|
—
|
|
|
—
|
|
|
—
|
|
|
284
|
|
|
284
|
|
Net loss
|
(16,295
|
)
|
|
(4,803
|
)
|
|
(14,075
|
)
|
|
(3,510
|
)
|
|
(38,683
|
)
|
Preferred dividends
|
(1,395
|
)
|
|
(1,395
|
)
|
|
(1,395
|
)
|
|
(1,395
|
)
|
|
(5,580
|
)
|
Loss applicable to common stockholders
|
$
|
(17,690
|
)
|
|
$
|
(6,198
|
)
|
|
$
|
(15,470
|
)
|
|
$
|
(4,905
|
)
|
|
$
|
(44,263
|
)
|
Loss applicable to common stock, per share
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.26
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.66
|
)
|
Diluted
|
$
|
(0.26
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.66
|
)
|
Weighted average number of shares of common stock outstanding
|
|
|
|
|
|
|
|
|
|
Basic
|
66,977,104
|
|
|
66,977,104
|
|
|
66,992,322
|
|
|
67,027,104
|
|
|
66,993,543
|
|
Diluted
|
66,977,104
|
|
|
66,977,104
|
|
|
66,992,322
|
|
|
67,027,104
|
|
|
66,993,543
|
|